Navigating Insolvency and Intellectual Property Dynamics
Welcome to the summer edition of Metis monthly Insights in which we dive into a few key themes on which we want to keep you in the kNOW. This edition we focus on current matters around the dynamic interplay between intellectual property (‘IP”) and the insolvency & bankruptcy market.
Our Bankruptcy & Restructuring Team has been busier than ever on a number of assignments in a wide range of sectors and IP asset types you can see below:
Trend 1: Notes of Advice in Demand Amidst Challenging Business Climate
These last few months a key theme has been us issuing a number of Notes of Advice (“NoA’s”) to insolvency practitioners and advisers, as business and IP sales have become more challenging in the continuing ‘choppy’ market. This has become a little more prevalent for business models that have been slowly deteriorating because of rising supply chain costs. Trade buyers are becoming more cautious as they often recognize 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 below valuation, necessitating the compliance need and soft-landing a Note of Advice can offer. This 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 carefully managed or maintained. As a result 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 were in fact generating tens of millions in revenues but still not quite yet cash positive month on month, as they continued 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 teams 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 valuation of the portfolio of IP assets was losing relevance and we were asked to provide NoA support in relation to different offers for bundles of IP assets. In particular the firms needed narrative in the form of “key factors impacting value” which typically are key factors identified in M&A and fundraising scenarios, when lenders wish to know the factors that could undermine value recovery and also potentially augment value recovery in a hypothetical scenario. Both of which require a real understanding of IP qualitative factors which we have built up over fifteen years, through extensive benchmarking. Advisors wanted narrative around these IP related factors to demonstrate how value was being undermined by the break up scenario. Key matters include understanding and narrating which IP assets were dedicated to drive which revenue streams, benchmarking them and rating the quality of the IP assets to identify whether they can justify an uplift in rating and valuation even in a break-up scenario, as a result of the strength and unique nature of some of these IP assets even in a 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 including lawyers. 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, they are usually less knowledgeable about the importance of the steps in the restructuring or insolvency process they are about to undertake. We’ve therefore been spending more time explaining the importance of securing specialist third party valuation support, from a valuer who has experience working on transfers at undervalue and providing expert witness reports and evidence in contentious situations. In a couple of those 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 transactions which were subsequently challenged again on relatively small transactions, where perhaps the focus was on cost / fee management and less on ensuring the right advice was being sought which in the long run just adds more time and cost to the overall process. While we remain in challenging economic and business environment its important that business owners in particular, seek out and take good advice early in the process to then be able to fully focus their time on their responsibilities to try to ensure the best outcomes for creditors rather than wasting a lot of time “shopping around” which can often be more costly in the long run.
Trend 3: Post-Insolvency IP Strategies
Another trend we’ve witnessed recently is business owners returning to us after the insolvency event often with a new found understanding of the importance of their IP in the business. They want to improve the strength and protection of their IP using our IP SCORE against our benchmark on which we’ve measured hundreds of businesses. This has also resulted in a few moving their IP into a separate entity after the insolvency event and seeking advice on royalty rates to use in a new group structure with the IP in new single entity.
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.