IP you can bite into

Having an intellectual property proportion in the value that your business is sold with can give you a huge advantage. By TOM McKASKILL.

By Tom McKaskill

Intellectual property (IP) can form the basis of a competitive advantage in a conventional business that would be sold on its revenue and profit generating ability, or the basis of strategic value for business sold to a large corporation.

 

Intellectual property, when taken in consideration to the value of a business, includes those forms of rights embodied in patents, trademarks, copyrights and brands, or those that stem from deep expertise.

The business advantage which accrues from IP is the ability to exploit it for commercial advantage where competitors cannot readily match your products or services in your target market. Thus, IP typically allows a business to charge a premium for its products or services because customers are not able to find close substitutes.

When we calculate the value of a business, we look to two different approaches to assessing value – the future stream of potential profits, or the strategic value. In the case of a conventional business, the IP generally provides a greater level of stability and certainty to future profit streams.

This has the effect of reducing the risk associated with the business as well as providing more certainty around future income projections. These two factors combine to reduce the valuation discount rate and generate positive present value for more distant earnings, both of which substantially improve current sales value for the business.

In the case of a strategic sale, IP is almost always at the heart of significant premiums on sale. The nature of the strategic sale is that the business being sold has some asset or capability that a very large corporation can exploit throughout their organisation or their customer base.

To have value, however, those assets or capabilities must provide a reasonable time for the acquirer to exploit them without being eroded or negated by competition. Also, to have value, the buyer must not be able to easily acquire, build, assemble or develop a similar asset or capability within a reasonable time period – say, two years.

At the same time, the strategic asset or capability, in the hands of the buyer, must be able to be scaled or replicated quickly to generate significant revenue. All these characteristics are present in good IP.

Most business can improve their profitability and growth potential by developing IP to enhance their competitive position. In doing so, they will almost certainly improve their current valuation in a conventional financial sale.

Those who are able to develop IP that would be of interest to a large corporation are especially fortunate because a strategic sale price would almost certainly be several times greater than that of a financial sale.

Entrepreneurs interested in selling their business would be well advised to examine their business to see what knowledge could be developed into registered IP.

Alternatively, unique expertise may be able to be documented and prepared so that it can form the basis of a strategic sale. By taking the time to uncover and package such IP, they may be able to position their business to better advantage, and thus gain a premium on the sale of their business.

For more on smarter ways to sell your business, see our Growth Resources, Exit, section.