The importance of securing intellectual property (IP) protection for any relevant brands, designs and inventions is very often overlooked by SMEs. However, the fact that such IP rights are key intangible assets to any business that can be used to leverage and encourage financing of the company to aid its growth, is even more likely to be a great unknown for SMEs - and one with great potential.

Put more simply, holding registered IP rights will increase the perceived value of any business in attracting investment and financing for a company. It can even make the difference between lending and not lending for some investors. Registered IP rights act as a form of insurance that the company holding those rights has achieved the freedom to use the rights and to prevent third parties from copying them. Is it any wonder such definitive rights are attractive to those looking to invest in or buy businesses?

If a business has an exit strategy for eventual sale of the company, any prospective buyers will perform thorough due diligence exercises before purchase. A key part of this process is to determine the extent and value of any IP in the company for sale. If no registered IP is in place, the eventual value and purchase price of the company will undoubtedly be far lower. One of the reasons for this is because the buyer could be taking on greater risk by buying a company who may actually be unaware they are infringing someone else's trade mark or invention.

Recent research commissioned by the Intellectual Property Office (IPO) on the role of IP in facilitating business finance is an important source of information for SMEs to review. The report can be found here.

As stated at Page 10 of the report, where a business is seeking equity or angel type investment for growth, 'it is clear that IP or intangibles that provide competitive advantage are a necessary (though not sufficient) precondition.'

Crowd-funding is an increasingly important source of investment for businesses. It is worth quoting Darren Westlake of Crowdcube in highlighting the attitude of a funding 'crowd' to IP and the need for businesses to do their IP homework and ground work before seeking funding:

"We funded an alcoholic drinks manufacturer. One of the prospective investors pointed out that there could be an issue with a German branded drink with a similar name. that's one instance where the wisdom of the crowd helped the company address the situation before they spent lots of money on building the brand." (at Page 10 of the report) The Business Growth Fund established by the British Banking Association in 2010 also champions the requirement for businesses to be aware of and to properly manage their IP. They stated:

"As investors, we expect the management team to be capable of recognising the IP in a business and exploiting it."

The report recommends that the IPO establishes a resource toolkit for SMEs and investors to make more effective use of the value IP represents in a business. A second recommendation in the report relates to building on existing initiatives to make sure financial institutions begin to properly recognise IP as security against lending and that the IP is indeed adding value to that company.

In terms of existing initiatives, it is a little known fact that a bank or lender can actually register and record a 'security interest' against a registered piece of IP which will act as a form of insurance for them against their investment in the company holding the IP. These interests are recorded on the relevant Registers of trade marks or patents, for example. More awareness of this fact by SMEs seeking finance and by investors and lenders themselves can ease discussions on funding a business and recognising the IP as a true asset.

There are steps and considerations every SME and business can consider with its IP in making the assets work for you and in using them as a funding tool:

  1. Even if you are not in the business of inventions, on average, all businesses have two trade marks they could register and more than 66% had one potentially registrable design. Have you reviewed and considered these? Ensure searches are conducted to check that your brands are not infringing someone else's rights. If the brand is available, registering them will give you a competitive advantage and will attract investors.
  2. Once you have registered IP in place, can your business adopt a licensing model so that licensees can sell your products or diversify into new products/areas? Can you build relations and links with potential licensees overseas to sell your products into new markets? If the answer to any of these is 'yes', you can licence the use of the relevant IP and make money from royalties or fixed sums from the licensees. Be careful to ensure any licence contracts are carefully drafted by professionals and that licensees are controlled.
  1. If you are in the inventions business or might be, find out more about Patent Box, a scheme recently introduced in the UK allowing companies to apply a 10% rate of UK corporation tax on worldwide IP profits arising from an invention that comes from a qualifying patent.
  2. If you are looking to sell a business or plan an exit strategy and your registered IP is in place, there are specialist IP valuation companies who can deal with the complex but recognised tested approaches to valuation of such assets. This will place an actual value estimate on the pure IP in the business. Although an extreme example, in 2013, the Apple brand alone, separate from its profits or other aspects of its business was valued at over $185m.
  3. Do not put IP on the backburner – investors of all kinds are increasingly expecting businesses to know about their IP, have protected it and be looking to exploit it. Doing the initial groundwork and then making those assets work for your business will lead to greater rewards such as further potential investment from external sources and the resulting growth of the company.

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.