Navigating the Dynamic Interplay between Insolvency and Intellectual Property
Welcome to the Autumn edition of our Metis Monthly Insights keeping you in the kNOW. This edition we are focused on the dynamic interplay between intellectual property (‘IP”) and the insolvency & bankruptcy market.
Our Bankruptcy & Restructuring Team, is busy specifically, running some IP sales processes in a challenging market and providing IP valuations to lenders.
Trend 1: Notes of Advice in Demand Amidst Challenging Business Climate
A key theme has been the increasing number of Notes of Advice (“NoA”) we are issuing to insolvency practitioners and advisers, as business and IP sales have become more challenging in a continuing choppy market. This has been more prevalent for business models that have been slowly deteriorating because of rising supply chain costs. As a result, trade buyers are becoming more cautious, as they often recognise the economic and financial constraints that led to the business failure and are therefore being more selective, leaving opportunistic buyers in the process, to sweep up assets, often significantly below valuation. As a result, restructuring advisers need support both from a compliance point of view and the “soft-landing” a Note of Advice can offer.
The need for NoA’s is “on point” for insolvency practitioners in situations where the IP assets form the majority of value left in the business and where there are no key third-party relationships, nor complex IP matters that need to be carefully managed or maintained, as a result, the IP sale is a little more straightforward. These are often situations in which opportunistic buyers can thrive.
Notes of Advice have also been required when the business has failed as a result of a disappearing runway and dwindling support from sponsors and lenders.
Recent Assignments and Cases
Two recent assignments were large software-rich businesses in highly regulated sectors and both were Unicorns valued at over $1bn in the past. Sadly, we have seen evidence of the damage being done by the liquidity crunch and slower fundraising cycles, as power has shifted from founders to investors. Both businesses were in fact generating tens of millions in revenues but still not quite yet cash positive month on month, as they scale up and continue to invest in the technology and software platforms.
Our IP valuation support was focused on a complex portfolio of IP assets, as in both cases, a break-up scenario would have destroyed value. The 3rd party restructuring advisers were working hard to secure the best outcome for creditors and staff, focused on maintaining the technology platforms and regulated operating entities.
In each case, as the buyers disappeared and the exit options narrowed during the sales process, our initial valuation of the portfolio of IP assets was losing relevance as buyer interest dwindled and so we were asked to provide NoA support in relation to different offers for smaller bundles of IP assets. In particular, the restructuring advisers needed our opinion on the “key factors impacting value” which typically are important in both M&A and fundraising scenarios rather than restructuring & bankruptcy situations. These are key IP-related matters that could both undermine value recovery or potentially augment value recovery in a hypothetical scenario and are typically qualitative IP factors, which would come sharply into focus in a sale scenario. Over the last fifteen years, we have accumulated significant benchmarking data that the advisers now required, to demonstrate how IP value was being undermined by the break-up scenario.
Trend 2: Early Engagement in Insolvency Proceedings
Another recent trend we’ve noticed on smaller R&B assignments is that we are being approached by business owners prior to seeking formal restructuring advice from professional advisers. Often, they are talking to two or three firms and haven’t yet selected one, yet they want to begin discussions about the value of their IP, as it’s an asset valuation they understand least about. As a result, without the guidance of an appointed insolvency practitioner or lawyer, they are usually less knowledgeable about the importance of the steps in the restructuring or insolvency process they are about to undertake and the importance of securing a proper IP valuation. In a couple of smaller cases the engagement has been less than smooth as the directors were not fully aware of their responsibilities and in particular the need to provide full disclosures around the IP assets.
On that same theme, we’ve recently been asked to review a few 3rd party IP valuations and IP sale transactions which were subsequently challenged. In fact they were relatively small transactions involving the valuation and sale of IP where perhaps the focus was on cost/fee management and less on ensuring the right valuation advice was being sought.
As a result, business owners in these difficult situations can be guilty of their short-term thinking adding more time and cost to the overall process.
As we navigate these recent developments, our commitment to providing informed guidance remains steadfast. We strive to equip businesses and insolvency practitioners with the IP insights, knowledge and strategies needed to support their decision-making in this ever-evolving landscape. Stay tuned for more insights next month as we keep you in the kNOW. Read past Monthly Insight.