Yesterday’s blog exposing as incomplete a Journal of Accountancy article that purported to outline a good approach to a CFO presentation in front of venture capitalists brought a question regarding what type of information regarding intellectual property should be available. It’s a good question.
Critical to most investments in business opportunities is a well-established intellectual property position with strategies, wherewithal and a willingness to protect those investments.
Intellectual property rights (IPRs) and other intangible properties are likely to be the value drivers for the target company’s success. Not only can they push and direct sustainable growth, IPRs can provide significant barriers to entry for competitors. It is imperative that investors and companies alike be able to properly assess IPRs prior to their investment. Here’s the point: without a thorough, well-researched intangible asset assessment, sellers inevitably will need to accept lower valuations. The VC (or acquirer, or lender) investment depends directly upon the return anticipated, and that return nowadays is tied to the value of the intangibles in the target company.
We asked consultant colleagues what kind of intangible asset review assessment is needed to make prudent investment decisions. Here’s a good summary:
- What are the intangible properties in the target company?
- What intellectual property rights are owned, over what time frames?
- What is the value of the intangible assets, and what can be done to increase that value?
- What is the likelihood of intellectual property challenges ensuing?
- Who are the competitive players, and what is their relative intellectual property rights position with respect to the target company?
Here's an example of how lending institutions use such data: Mike Moberly, BVR's Executive Editor for IP Value, recently interviewed a Brazilian banker about the importance of this type of review and analysis. This bank routinely sends out a team to conduct a three-day asessment of a client company's intangible assets, across industry sectors. One outcome of the assessment is that it yields a proprietary "ranking," which the bank uses to set loan interest rates. Ahead of its time? Perhaps. But the need for CFOs to get a handle on their intangible assets is here, now.