Intellectual Property (IP) and other ethereal assets, such as patents and licenses, can add value to your business, just as tangible assets such as machinery do – if not more so.
For one thing, IP doesn’t take up room like a machine does! And IP can result in a higher multiple when you come to sell because it generates a revenue stream, even when you’re asleep, on holiday or, heaven forfend, when you finally shuffle off this mortal coil.
I once sold one of my own businesses which was 100% based around an Intellectual Property. When we sold it, the revenues were £100k per annum with an overhead of £200k and a balance sheet of minus £500k.
On the face of it, this business was worthless but it sold for £1.2 million just 4 years after its inception.
And that was purely because the IP we had created was likely to generate revenues of c£15 million to the buyer over the next 3 years. How? Because we had laid the foundations of an IP that they were very well placed to exploit through their existing channels and infrastructure.
And, because they no longer had to pay us royalties to use the property, they stood to save £1.5 million over the same period, thereby making the deal self-financing. That was 10 years ago and the buyer is still exploiting the brand today.
So, if you can create Intellectual Property and licence it, you will create recurring revenue and buyers love recurring revenue. This could be designs, patterns and images but it could equally be software or games; patents and innovative ideas or products.
When ex-Lotus engineer Ron Hickman invented the ‘Workmate’, he saved himself a lot of heartache (and probably a small fortune) by not setting up a factory to make the products and trying to get distribution deals himself. Instead, he agreed a licence deal with Black & Decker who already had production facilities and sales channels, and they paid him royalties for life (and probably beyond). Pretty much all he had to do then was sit back and watch the royalty cheques arrive every 3 months.
Other producers combine production of their own core products with licensing of their image or brand. Emma Bridgwater being one example, where her company manufactures the core products but most other products you see for sale in retail (e.g. tinware, gift wrap, textiles, etc) are licensed to 3rd party manufacturers because, when your manufacturing plant is geared around producing a specific product, such as ceramics, it probably doesn’t make sense to start producing tinware and textiles, as well. You get the reward without the risk.
So, does your business have the potential to leverage intangible assets?