PART I
In virtually every bankruptcy situation today, the question of intellectual property-identifying, valuing and disposing of-has become of serious importance. We provide an overview of how to identify intellectual property (IP) and intangible assets and how to group those components into bundles of discreet value.
It is useful to review some of the most important questions one faces when sorting through the issues surrounding technology, IT, patents, trademarks, brands and other intangibles, collectively grouped together as IP. Some of those key questions are the following:
- What kinds of IP does a company have?
- How best can the IP be identified?
- Does the IP maintain its value when it is in bankruptcy?
- Who owns and controls that value?
- Do existing licenses have value?
- Who controls the destiny of those licenses?
- How do you value these assets in a liquidation scenario?
- What sort of liquidation discount is experienced when a patent, trademark, copyright or software license is sold?
- Is there a formula to establish the descending value of these assets in liquidation?
- How do you market and dispose of these assets most cost-effectively and effectively?
While each bankruptcy is different, there is a basic four-step process when valuing and disposing of IP and intangible assets. Sometimes our task is to simply value the assets, while other clients have asked us to assist in the disposition or sale of their intellectual property. Some of the latter include Boston Market, Kenar, Montgomery Ward, Heilig-Meyers and Polaroid. In nearly every case, the process breaks out into four primary levels of activity:
- First is the audit and identification process, during which all intellectual property, IT and other salable intangibles are identified.
- The second step is to place market values on the assets.
- The third step in the process is to develop a plan to monetize those assets.
- Finally, the securitization, sale or disposal phase completes the process.
A company's intellectual assets should be viewed as a portfolio of IP and intangibles, and similar types of IP should be bundled into logical groups for valuation and sale or monetization purposes. When analyzing a company's intellectual assets and identifying those with value, a simple five-part process typically suffices:
- Identify all the elements of IP that may hold value.
- Look within all operations of the corporation, including marketing, IT, branding, legal and R&D, as well as operating subsidiaries and companies.
- Think of these individual assets as elements of a larger whole—components of value within a logical bundle or grouping.
- Identify all intangibles, even small assets that might not necessarily be large enough or important enough to isolate and sell on their own.
- Once the elements or components of value are all identified, the components can then be bundled into logical groupings for analysis, valuation and possible monetization.
Intellectually, the process is simple. However, the actual identification, collation, triage and valuation of these components of value can be time-consuming and complex.
A word of caution: Speed is of the essence, and these assets must be quickly and efficiently identified and packaged. It is important that key IP pieces not be skimmed off by secured lenders or others. The process cries out for the use of professionals experienced at the assembly, valuation and disposal of intellectual property, and to speed the process and to ensure that all assets are identified and value-maximized.
PART II
In this article, we provide a quick guide to the bundling of assets. We review 15 primary and secondary IP groups. We also touch on the valuation process and look at the basic formula for establishing value for intangible assets in bankruptcy.
Each company is different, and therefore the IP with value in each reorganization will be different. Some companies have substantial value in their trademark assets, others in their information technologies. Others may have real estate-related intellectual assets or broad groupings of patents and proprietary software. There are some groups or bundles that, in most situations, will have primary value, and others that will be less important.
This listing is not intended to be exhaustive. Instead, it is offered as an overview, checklist or guide to IP value.
- Trademarks
- Primary classes of registration
- Secondary classes of registration
- With and without logo device
- Primary country
- Secondary countries
- Pending applications
- Foreign
- Domestic
- Other Brand-Related Assets
- Logo design
- Character devices
- Jingles, music
- Advertising concepts
- Copyrights
- Sub-brands
- Trade dress
- Internet-Related Assets
- Domain names
- Website design
- 1-800 numbers
- Linkages
- Embedded customer base
- Patent-Related Bundles of Value
- Other Technology Assets
- Product-Related Assets
- Corporate Identity Assets
- IP Contracts
- In-licenses and out-licenses
- Franchises
- Co-branding agreements
- Endorsement deals
- Spokesperson contacts
- Venue naming rights
- IT/Software
- Data/Information-Related
- Research-Related Assets
- Real Estate-Related Assets
- Zoning rights
- Permits
- Rights of way
- Easements
- Building rights
- Air rights
- Communications-Related Assets
- Cable rights
- Transmission rights
- FCC licenses
- Bandwidth
- Certifications
- People-Related Assets
- Embedded work force
- Work-for-hire contracts
- Pre-paid temporary help contracts
- Specialty business skills
- Customer relations/lists
- Noncompete clauses
- Miscellaneous
- Packaging technology
- Product shapes
- Retail systems
- Coating technology
The Valuation Process
The most important question becomes, how is the bankruptcy or reorganization going to affect the value of these assets? In broadest terms, the formula for valuation of intellectual property in a bankrupt company is essentially based on current, ongoing market value, minus a sizeable liquidation discount, minus further reductions if similar assets from another bankrupt company are on the market.
Methodologies for valuing these assets have become more sophisticated over the last 20 years. In its simplest terms, liquidation value is that lowest price at which an asset will be pegged to ensure that there will be a sale. Liquidation values are very context specific and much affected by other assets that may be available.
A vexing issue in establishing value in bankruptcy is to ascertain liquidation value in a rapidly changing environment. Questions most often asked include: “What liquidation discount is experienced with a patent versus a trademark versus software?” and “How do you predict the descending value of these assets when they are faced with a liquidation scenario?” Often the question asked is, “What is the best method to establish market value and dispose of these assets in a cost-effective and time-effective manner?”
The monetization alternatives available to the court and the estate in a bankruptcy include:
- Securitization via a lien on a specific asset or bundle of assets for secured or unsecured lenders
- Debtor-in-possession (DIP) financing
- Take-out financing
- Partial sale of noncore assets to third parties
- Award of some noncore asset to creditors
- Blanket sale of all intellectual assets in a stalking-horse auction or other proceeding
- Orderly disposal of these assets via the retention of a firm of IP professionals, to maximize value
Any overview of valuation and securitization must stress thorough identification and accurate valuation, as well as looking at all of the options to monetize the assets. Intellectual and intangible assets represent the industrialized world's most undervalued group of assets.
Most importantly, there is an increasing recognition by bankruptcy and other courts of both the importance and the value of intellectual property. Similarly, secured and nonsecured creditors, trustees, corporate estate management and other stakeholders all recognize the growing importance and value of IP assets.