Once the company identifies potential assets, Sherman advises them on erecting appropriate barriers with patents, trademarks, copyrights, nondisclosure agreements, and the like. He stresses that the decision to offer intangibles outside the business should depend on how protectable they are. No one will buy the cow if he can just take the cow--and perhaps try licensing the milk himself.
Such exercises are effective, but businesses that want to exploit every scrap of value will go further. Sherman urges companies to forge "cultures of innovation" that prevent intangible assets from becoming invisible in the first place, by focusing everyone on their creation. To achieve that, walls must come down between functions and formal and informal channels of communication must be established to ensure constant cross-fertilization of ideas. Employees must learn to recognize intellectual assets and know to enlist counsel when they see such assets brewing. Someone needs to direct innovation from the executive suite--Sherman likes the title chief innovation officer. And human resources departments must hire and reward employees who keep the IP storehouse well stocked.
The payoff from such rigor may be a valuation far above the sticker price of even several Rembrandts. Sherman is working with a company poised for acquisition by an $8 billion corporation for a price barely hinted at by the target's unimpressive earnings. "What's making this attractive to the buyer is the intellectual capital that the founder has developed over the last 25 years," says Sherman. "What makes the negotiation interesting is we are focused on the value of these assets in the hands of the buyer, not the seller."
As businesses get smarter about valuing intangibles, potential customers, acquirers, and investors will likely apply a whole new math to their dealings. What they see, they will know, is only part of what they'll get.
To successfully mine their companies, CEOs must recognize ore when they see it. The following categories of often-overlooked intellectual assets are the right places to start digging.
Brands: This Identity Is Big Enough for the Both of Us
Brand extensions may be the most visible means of exploiting intangibles. Businesses with great brands can license their names and logos, or franchise their operations, or co-brand with noncompetitive, strategically suited partners. Each year Harley-Davidson (NYSE:HOG) and Coca-Cola (NYSE:KO) derive millions of dollars in royalties from the sale of products bearing their insignias. Starbucks (NASDAQ:SBUX) licensed its name to Jim Beam for a coffee-flavored liqueur; Iams co-branded pet insurance. And who can forget the late lamented Hooters Air?
Brands don't have to be global or even household names to be desirable. Few people have heard of Los Angeles-based Vampire Wines, for example. But that didn't stop the $2.5 million beverage marketer from co-branding with New Line Cinema (NYSE:TWX) for Blade: Trinity and with Sony Pictures (NYSE:SNE) for Underworld Evolution. In both cases, the studios placed movie logos on the company's energy drink, Vamp, a promotion for which they paid Vampire Wines nothing. "But we used the co-branding to close a deal to get Vamp into the 7-Eleven chain nationwide," says CEO and founder Michael Machat. Machat adds that revenue rose more than 50 percent after Blade: Trinity, and he thinks a good deal of the jump had to do with the promotion. More recently Vampire worked out a deal with Rhino Records to promote an album of goth music.
Sometimes brands can even be used as collateral. Three years ago, the Los Angeles-based fashion house BCBG Max Azria Group sought $53 million to extend its wholesale and retail channels--in particular to expand the number of BCBG Max Azria stores. (The company has 150 retail outlets in the U.S.) An investment banker suggested that the business might be able to collateralize some of its intellectual property to secure a loan, an unusual strategy in the fashion and entertainment industries despite the glamour of those brands. "We found the idea interesting as a possible way to raise inexpensive, long-term capital," says designer Max Azria, who is sole owner of the nearly $1 billion business. "We were able to secure reasonably priced long-term capital from a major institutional investor--a major insurance company. Associating ourselves with such a high-quality lender helped us in future financing."
BCBG Max Azria licenses its trademark to other companies for some products, such as footwear; the licensees then pay BCBG Max Azria a percentage of sales in royalties. The company created a special-purpose subsidiary to hold the trademarks and related licensing income; the loan was secured through the subsidiary's assets. The subsidiary had a high credit rating and consequently received favorable interest rates.
"We always believed in the importance and value of the company's trademarks," says Azria, who borrowed the acronym BCBG (for bon chic, bon genre, or good style, good attitude) from Parisian slang. "We are strong believers that advertising, marketing, runway shows, and media exposure all work toward increasing the value of the brand and the trademarks."
