How to leverage trademarks

Most Canadian business owners understand continued prosperity requires growth, and new financing is often needed to meet expansion goals.

Of course, it’s possible to borrow against tangible assets such as real estate, equipment, accounts receivable, and inventory. But when those assets don’t provide enough collateral (or are already leveraged) intangible assets like trademarks, patents, research and development, goodwill, customer relationships, brand, proprietary technologies, market share and reputation should all be taken into consideration.

Numerous situations can call for funding needs beyond what’s attainable form tangible assets. A company might face an acquisition, ownership succession or buyout. Or, it may want to expand or enter a high-growth phase, which can’t be supported with traditional lending. It could also be a service business, or distributor, that has no fixed assets to leverage.

Faced with any of these circumstances and knowing it’s wise to preserve working capital for daily operations, a company will need a lender capable of considering both tangible and intangible assets.

If the owners of a mid-market food processing company wanted to transition their business to the next generation, they may be able to structure financing that recognizes customer relationships, and proprietary technology. While neither of these show up on the balance sheet, they can be factored in to creative financing structures.

Or, say a midsized parts distributor plans to purchase a trademark for a branded product line. If the company had a profitable history, strong management, and a business plan that forecasts continued results, the lender could fund the purchase based on the strength of the business, not solely on underlying collateral.

Several key factors are indicative of future success.

• The quality of a company’s management. These teams need complementary skill sets in sales, finance, HR, logistics, technology, etc. Each executive’s background will be taken into account including education and current and past success. Lenders might review how the management team handled a particular situation, such as the 2008 economic downturn, as an example of their value to the company. During that time, some management teams did little, hoping for the best while profits disappeared; others took immediate steps to preserve or even improve their results. Lenders look for this proactive behaviour because strong management is vital to a business’s long-term profitability. Ultimately, it’s future profitability and cash flow that will repay debt.
• A solid business plan that includes an analysis of the company’s strengths, weaknesses, threats, and opportunities. Whether the business is young or well-established, it must understand its market and positioning. Price alone is not a sustainable competitive advantage because in time someone else can always find a way to make it (or do it) cheaper.
• A diversified customer base. This reduces dependencies and vulnerability to any one customer.
• Quality information systems that provide timely, accurate information to management.

Rania Llewellyn is president and CEO of Roynat Capital.