Asset-Based Lending: Intellectual Property
Traditional asset-based lending relies on current assets such as accounts receivable and inventory, and tangible assets such as real estate and machinery and equipment as collateral. In today’s marketplace, some lenders are now accepting certain intellectual property (IP) assets as collateral. IP assets such as trademarks, trade names, patents, and copyrights are being used to secure loans issued by banks and other lenders. In most situations, IP assets tend to act as “credit enhancers” and are included in a portfolio of assets that serves as collateral. However, we are also seeing patents and trademarks that generate significant royalty and licensing income used as the primary loan collateral. The rise of technology companies and the importance of intangible assets in today’s economy are reshaping the lending environment and the lending standards that govern asset-based loans.
Some situations where IP assets are being used as collateral are:
- Debt financing when main sources of revenue are licensing income or royalty streams coming from patents, trademarks, trade names, copyrights, or other intangible assets
- Mezzanine financing
- Dividend recapitalizations
- Subordinate loans offered by junior lenders with a primary lien on IP assets and a secondary lien on tangible assets (“bifurcated collateral” financing transactions)
- High-yield term loans offered by hedge funds and investor groups
- Debt financing immediately following an equity financing round, often in cooperation with venture capital and private equity firms
Appraisal Economics has extensive experience valuing IP assets. Some of the industries in which we valued IP assets include: (i) biotech, pharmaceuticals, and medical devices, especially companies with planned or ongoing clinical trials; (ii) software; (iii) semiconductors; (iv) internet technology, content, and advertising companies; (v) alternative energy and green technology; (vi) specialty chemicals and renewable materials; and (vii) manufacturing, among others.
We work with traditional lenders such as commercial banks and middle market financing firms. Our client base also includes non-traditional lenders such as hedge funds, investment banks, and investor groups. We also value IP assets as potential collateral for borrowers, venture capital, and private equity firms.
Appraisal Economics provides IP asset values under value-in-use and liquidation scenarios using the three primary approaches to determine value: market, income, and cost. We use multiple approaches to support our value conclusions. For example, our expertise in IP assets, especially patents, allows us to use both income and market approaches in many cases, as we are experienced in examining transactions in the secondary markets to arrive at fair market values under going-concern and liquidation scenarios. Our valuation approach is not simply limited to altering the discount rate to account for the contingency of liquidation. We prepare our analyses in the context of the immediate industry in which the IP assets are immersed, considering the level of competition, industry trends, prior liquidations in similar industries, mergers and acquisitions, patent generating activity, the patent portfolios owned by competitors, and the behaviors of patent aggregators in the marketplace.
The added value we provide in the form of special expertise and market knowledge significantly enhances our ability to determine accurate and defensible conclusions of value. We provide opinions that are independent of the parties involved in secured lending transactions. To learn more, please contact us.
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