Founder and Principal

 

 

November 2012 Vol. 1 No. 3

 

 

 

 

 

Goodrich & Associates
[email protected]
www.goodrich-associates.com
781.863.5019

 

One of my specialties is winding down businesses after major assets are sold. Part of that process involves monetizing the little stuff - things which can be substantial in aggregate.

Taken together, these small items (I call them "nuggets") can be large. How large? When instead of liquidating the business, it is either being sold or refinanced, selling these nuggets often funds the runway needed to close the transaction. And while healthy companies often have as many or more such nuggets, they typically don't notice them, as they are buried under bigger, easier-to-see treasures.

There are several places to look for the nuggets. One obvious source is what you can see... physical stuff ranging from equipment, buildings, land, parts, products, etc. Another place is deposits and refunds, as well as turning small parts of a business into viable things that can be sold.

In one case, when liquidating a scrap metal company, we found that some of the equipment, when weighed, was worth more as scrap than the liquidation values projected by the lender's appraiser. On further investigation, it turned out we were even standing on nuggets. There were so many metal scraps that had worked their way into the top three feet of underlying soil, that we sold the soil!

In today's newsletter, however, we're going to focus on one particular type of nugget: Intangibles - the conceptual stuff that doesn't physically exist. This includes everything from patents to other intellectual property to old receivables - even litigation. (We'll cover other nugget types in future newsletters.)

• Intellectual property. Trademarks, trade names, service marks and Internet domain names make up a major section of intangibles called intellectual property (IP). A confusing term, as there is often little intellectual about the stuff.
  
  Nevertheless, these are the brand name-related sources of value that are created by law or regulation. The major source of recovery for the bankruptcy of internet retailer Etoys, for example, was a domain name that sounded close to Toys R Us. That company bought the domain name in question for a high seven-figure number that funded the case.
  
  Other examples of IP include computer IP addresses (a different type of IP meaning "Internet Protocol") and telephone numbers. Because these numbers are limited, large blocks of IP addresses and telephone numbers in desired area codes (such as 212) have value. (Note there are several tricky steps that must be taken to successfully monetize these assets, so contact an expert.)

• Leases and other cash flow streams. In addition to property that is owned and leased to a tenant, other cash flow sources of recovery include earn-outs, portfolios, royalty payment streams, etc.
  
  For example, when I liquidated a factor (a company that pays cash for receivables), the good receivables were sold to a competitor for asset value plus an earn-out based on a formula. That earn-out was transferred to a secured party, who, when they collapsed, sold the right to the earn-out stream to another party.

• Patents, knowhow and trade secrets, the IP that can also be intellectual. These assets typically govern how something is made, works or functions. "Patent trolls," competitors and the like will bid on these. Make sure, however, that these are not supporting assets of a more valuable business that can itself be sold.

• Proprietary software. Software developed to run a business can sometimes be sold, particularly if it supports a business that is being sold and the buyer doesn't want the headache of directly supporting the software itself. Don't forget so-called "embedded software" which controls equipment the company may have made or sold.

• Customer contracts. In service businesses, particularly during a period of industry consolidation, the winning consolidators are often just interested in the customers and their contracts to service with their operations.
  
  Companies that are liquidating, particularly through bankruptcy, can get a better recovery by only selling the customer contracts that easily fit the buyer's way of doing business. The seller's costs and liabilities to fulfill those contracts the buyer doesn't want are typically only paid after secured parties are paid and on a pro rata basis with all other unsecured creditors from remaining funds.

• Receivables. Any right of payment for that matter, no matter how old, such as earn-outs, notes, etc., can be sold. Several years ago, for example, I liquidated a call center business where the callers were based in India, system software was developed in Canada, and the sales and management were based in New Jersey.
  
  The business struggled on the sales side, so to generate "sales," the company bought three-year-old credit card receivables and tried to collect on them. Three years later, those now six-year-old receivables were able to bring in 20 cents on the dollar for receivables that were uncollectible by the original seller.
  
  For healthy businesses, selling receivables not only brings in cash, but may also accelerate the ability to recognize a loss for tax purposes.

• Litigation, particularly in a bankruptcy context. The rights to litigation can be placed in a trust and distributed to creditors. Those creditors may in turn sell those rights to others who specialize in buying them.
  
  For non-bankruptcy situations, there are investors who will fund litigation and share in the proceeds. Many high dollar litigators will take a case on a contingency basis and sometimes even fund expert witness costs.

• Copyrights. This is essentially the same as monetizing any other stream of payments. The copyright is licensed and a fee is collected and the associated fee stream can be sold (or the copyright simply sold to a business that does that).

• Customer lists. When there are no buyers for the business some money can be generated by selling the customer list and any relevant customer information (such as pricing) to competitors.

• Supplier contracts. Those with favorable pricing are of particular value, particularly in bankruptcy where the bankruptcy code can trump anti-assignment clauses in the contracts.

As you can see, there are many, many examples of nuggets. Most companies have lots of them. When companies are liquidated, often the nuggets are all that is left. That means when the companies were healthy and viable, they never monetized their nuggets.

What nuggets are you sitting on?

One of the reasons the direction of the US economy is hard to discern is consumer and business confidence are diverging. 

Read the article from Liz Ann Sonders, Schwab's chief investment officer to learn more.

Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent financial problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.

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