With COVID-19 wreaking havoc on many of the world’s economies, now is the time to ensure you are generating maximum value from your business. That means not just working harder but working smarter.
While many companies’ first instinct will be to continue to produce the physical goods and services they always have, in the current movement restricted and highly volatile market environment this strategy may not be the one that creates the best return on investment. Leveraging your business’ most valuable assets: its intangible assets can generate substantial additional economic value.
Unlocking value from intangible assets
Let’s go back to first principles: there are three fundamental ways to unlock value from an intangible asset such as data, content, brands, software, patents, confidential information and product designs.
- Deployment – which involves turning the idea/intangible asset into a product (or service), which is then manufactured, marketed and distributed. This is what companies do most of the time because and they never tend to look at options 2 and 3
- Licensing – which involves licensing the intangible asset (the brand, product design, content etc) to a third party who uses it to deploy (to make products and services – option 1 above) and who in return for that use pay you a fee/royalty; or
- Sale – which involves selling an intangible asset to a third party who then either licenses it (option 2) on or deploys it (option 1) themselves.
Each of these business models require different levels of the three fundamental business inputs of i. risk, ii. resources and iii. time; and generate very different levels of output in terms of $. However, fundamentally the more you put in, the more you get out, with a very rough rule of thumb being that for every dollar you make selling intangible assets outright, you will make $3 licensing them and $9 deploying them. However, that’s not the end of the story.
Deployment: greater risk, higher rewards
When it comes to business models, deployment tends to be the most input hungry, but it can also produce the highest economic output. However, “output” represents a business’ absolute monetary return, rather than the margin or overall return on investment.
The significantly higher inputs required for a deployment model mean that even though it might generate a higher level of absolute monetary outputs, when we subtract away the risk, resources and time required to fund that deployment some business’ find that they are better off licensing or selling their intangible asset.
If you look around, some of the highest margin industries in the world such as content generation (Disney, Hollywood), software (Microsoft, Apple), data (Google, FaceBook) and design (LVMH, Prada) are based on business models that involve the license or sale of intangible assets rather than deployment. These businesses are also more likely to weather market disruption as they are typically able to and evolve and adapt faster than businesses that are tied to heavy, tangible assets.
Consider the following in the current Covid-19 situation: a product design company that licenses it ideas vs a steel mill that manufactures steel products. The product design company’s employees can walk out over night with their laptops, can be working from home in 24 hours and can “ship” their ideas anywhere in the world via email. The mill on the other hand is in deep trouble. First there is an expensive shut down procedure (and another on startup). Then while the mill is idle it earns no money. And even if it had product to ship there is no way to ship locally let alone to the other side of the world. I know which company I would rather own.
The key to someone else’s lock: to license or to sell
For companies with innovative intangible assets but with limited capital or market access, sale or license of those assets can be extremely lucrative.
To determine if a sale or license strategy makes sense, it is important to look at whether your intangible assets are more valuable in your hands or in someone else’s.
To evaluate this, you need to work out the business case for how your intangible assets can be utilized. You need to determine not just how your intangible assets enable your activity in your own markets, geographies and products (and the likely ROI for each of these scenarios), but also look at whether those same intangible assets could deliver the same – or more – value for other companies. If the assets you have developed are the key to another companies’ success, then these assets could potentially be of enormous value to them.
A good way to visualize this is to think about your intangible assets as a key. Now this key might open several doors within your own business, but there is also the potential that your “key” also works in someone else’s lock, opening a door that is highly valuable for them to go through. If this is the case, ironically your intangible assets could potentially be more valuable to someone else than you! And you can make that happen via a sale or licensing agreement.
Use someone else’s scale
Importantly, if your intangible assets solve a major issue for someone else’s business then the value of these assets is likely to bare little relationship to the economic value that your business is generating at its current scale. This is due to the fact you can leverage your intangible assets into an entirely new market at a vastly different scale by licensing or selling to a third party who has access to that at-scale market.
For example, we assisted a small company to license a unique dairy packaging technology. The business had a culture of coming up with innovative ideas which it tended to manufacture itself as physical products. Unfortunately, these great ideas were trapped in products shipping into a sub-scale domestic market and the company did not have the capital to manufacture or sell large volumes of units much less penetrate at scale offshore markets.
To overcome these problems we suggested licensing the underlying intangible assets (the “key”) to major dairy companies in North America and Europe who desperately needed innovations (“the door”) to reinvigorate their product offerings to the huge consumer markets they served. We negotiated a licensing agreement for the packaging which ultimately led to the company being paid royalties on over a billion units – vastly more units than they could ever have shipped themselves. As these royalties were almost entirely EBIT (there are relatively low costs associated with licensing) this resulted in a massive increase in our client’s earnings: EBITDA increasing 15X with virtually no capital investment required!
Even in a shipwreck, there is always value to be found
In another example, we worked with the investors in a failed start up to sell its intangible assets. The management team had long since gone and the only assets left were intangible. Ultimately, we sold those intangible assets to a Fortune 200 company for tens of millions of dollars, generating a 45X return to shareholders. This was vastly more than the company would likely have ever made if it had launched the technology itself.
This point is particularly relevant given that COVID-19 has the potential to drive the global economy into a recession, resulting in 10’s or 100’s of thousands of business failures. In many cases these failed businesses will have valuable intangible assets the sale of which could either save the business or alternatively generate much needed capital to pay creditors and shareholders.
Sale and licensing can also prove to be a lucrative path for larger, established companies too if they have intangible assets that are either not being utilized or fall outside core business. In these instances, selling or licensing those intangible assets is an extremely effective tool to generate additional revenue or releasing capital back into the business.
For example, in the early 1990’s IBM’s enormous patent spend led it to switch from a protection-focused intangible asset posture to actively licensing these assets. Within three years its intellectual property unit moved from being a net $250M cost centre to generating over $1 billion in net earnings. IBM would needed to have sold $20 billion worth of product to generate that same level of earnings.
Working out what strategy is best
To take advantage of these strategies companies first need to increase awareness and understanding of the intangible assets they hold, beginning with answering:
- What intangible assets do we own?
- What is the extent and nature of the intangible asset risks we face?
- What is the impact of our intangible assets on the company’s performance?
- What are the businesses cases in which the intangible asset will add value to my business?
- What are the business cases in which the intangible assets will add value to someone else’s business?
Addressing these questions can help you take a more measured view of how to manage and utilize your intangible assets and work out which strategy will provide the best return on investment. In the current environment, it is also important to look at the likely time frames required to see a return on investment under each of these strategies and factor in your company’s cash flow and access to the capital required to implement each strategy. In this regard it’s worth noting that sale and license frequently generate returns far faster than the long path to building physical distribution required for deployment.
A combination of the models can also generate powerful advantages and provide business flexibility: for instance, deploying in one territory or market segment and licensing in another. Another option can be to sell your intangible asset and license it back for use in your own industry while the buyer uses it in others.
Although the default strategy for most companies is to deploy, this should no longer be the case. Today, high margin returns are increasingly owned by those who license or sell intangible assets – by providing the key that will open another company’s lock – either instead of, or in addition to, solely deploying your products. In a knowledge economy it pays to be smarter than the herd.