UK: Use Your Intellect (Getting The Most Value From Tangible Assets Such As Intellectual Property Rights And Branding)

Last Updated: 20 July 2012
Article by Jackie Maguire

Originally published on www.insolvencynews.com

Evaluating the intangible assets of an organisation during an insolvency is a tricky business. Having intellectual property rights that could be sold on as part of these assets can be a tremendous help to a firm and its creditors – yet intangibles are seldom discussed.

Intellectual property protects a person or organisation's rights to particular information and ideas, as well the way in which they are expressed. Insolvency practitioners (IPs) may not always understand the quality and value of the intangible assets being disposed of as part of a sale from insolvency, while creditors may question the value realised unless the intellectual property value is robustly assessed. The buyer of assets out of administration also needs to understand the value of the intellectual property.

An asset class
Intellectual property is becoming a prominent asset class but is still underrepresented on balance sheets. Just like other assets, intellectual property can be valued, bought, sold or leased. Administrators in an insolvency case need to check if any intangible assets are likely to be material and what their value is as it could be considerable. In insolvency, intellectual property may be the only asset.

Intangible assets such as brands now contribute by far the greatest shareholder value in many sectors and many organisations consider their brand to be their most important asset.

Since the end of 2005 all larger quoted firms have had to adopt the International Financial Reporting Standards (IFRS). The legislation specifies that any intangible assets obtained through a business acquisition should be valued independently of the auditors and that this value should be identified on the balance sheet of the acquirer.

This seems excellent in principle. However, even if the assets have been included on a balance sheet, intellectual property is often not valued accurately, and information provided may not be detailed enough to be useful.

One of the issues is that identifying the intangible assets within the business may not have been straightforward. For example, if a company co-owns rights with someone else, there can be tricky issues to resolve even with expert help. Some products are also likely to involve a 'bundle' of different assets, where the finished product may be more valuable than individual assets.

The valuation needs to rely upon sound data, information and expertise, which are not always readily available. We believe that, although it is a good thing to be recognised as being valuable and as a boardroom issue, it is really important to arrive at a fair market value in an independent valuation. This requires robust consideration of all the factors involved and assessment of the risks as is accepted practice by regulatory authorities and standards bodies.

Valuation specialists use a number of different ways to assess brand and other intangible values. Examples include the cost approach, the market approach, and the income approach.

The issue of intangible assets should be considered at an early stage, as a great deal of the value often resides not just in the patents, trademarks, copyright, designs, trade secrets and so on, but in other intellectual assets (know-how, processes), and intellectual capital (reputation, relation - ships ,contracts). When key employees leave, their knowledge may leave with them. Dealing with this kind of insolvency scenario from an IP perspective can sometimes be a race against the clock, as rights can be lost or diluted if not taken care of in a timely manner.

An administrator should establish what intellectual assets the company owns, and whether they are live and valid. Valuation challenges sometimes arise when patents have been registered by earlystage companies for products or inventions which do not yet produce income or royalties, as it is more difficult to assess likely value.

Increasingly, insolvency practitioners are turning to intellectual property specialists to provide an independent valuation to determine when an insolvent company has patents, trade marks/brands, copyright or domains that may be of value. These specialists need to have expertise in valuing intangibles inside businesses within an administrators' budget and the tight timescales often essential to concluding a fast and satisfactory sale of the assets.

There are many examples to show how intellectual property can realise significant value in insolvency. Whether it is sold with the core business and assets or separately, those involved in administration can work successfully with intellectual property experts to deliver maximum value for creditors and the success of any business going forward.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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