Intellectual Property Value in the COVID-19 Era
Date July 2, 2020
Originally published in The Secured Lender
The coronavirus pandemic has opened the flood gates on bankruptcies and business closures. Some of those closures will include businesses with widely recognized brands and other intellectual property (IP). Recent industry research estimates that apparel brands alone could face up to a 20 percent drop in brand value due to COVID-19. Given that business was already strained in some retail segments, the onset of a pandemic has made the struggle to survive more difficult if not impossible for some businesses. Despite this prediction and the perception by some that brand value deteriorates when a business experiences stress or economic conditions decline, some brands may have the potential to carry more value in a post-COVID-19 economy. A company’s brand and other IP could in fact gain value during a time of change and could even be a businesses’ most valuable asset going into volatility or restructuring.
A strong brand can be an invaluable asset during challenging times, especially during the current economic environment created by the COVID-19 crisis. A well-managed brand can help a company weather an economic storm and provide value, even if the company itself is losing revenue.
When we talk about brands we are not talking about trademarks or trade names only. While the terms “brand” and “brand name” are often used as synonyms for “trademark” and “trade name,” a trademark is, per the United States Patent and Trademark Office, “…a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others.” The term “brand” is larger and typically refers to a group of complementary assets such as the trademark (or service mark) and its related trade name, formulas, copyrights, and technological expertise (which may or may not be patented). Furthermore, a brand, as used here, includes the presentation and image of a company and its products. It infers the recognition and acceptance of the branded products. Brands include the trademarks, logos, current and past designs, copyrights, channels of distribution, design legacy, advertising concepts and masters, website, and more. A brand embodies the experience, feel, and emotional connection of the consumer to the brand.
The perception that intangible assets, such as brands, can diminish during difficult times could be the result of the financial reporting process that companies go through after an acquisition, which requires the acquisition price paid to be allocated to the total assets acquired. Although the reporting rules say otherwise, the acquisition price might be more likely allocated to financial assets and fixed assets, and if there is not “room” left in the acquisition price, little or no value may be allocated to the intangible assets. The result is that the market does not see intangible asset value reported in many stressed business acquisition transactions, even though there is in fact practical value in the brand. Additionally, if a company has intangible asset value on its balance sheet, it needs to be tested for impairment when a triggering event occurs, such as the economic downturn caused by COVID-19. Impairment testing may result in a brand’s “Fair Value” (as defined by ASC 820, ASC 350/360) being less than its book value, thus incurring a write-down in value. As a result, the market sees write-downs of intangible assets during challenging times even when the fair market value or highest and best use value might still be strong.
A strong brand can be an invaluable asset during challenging times, especially during the current economic environment created by the COVID-19 crisis. A well-managed brand can help a company weather an economic storm and provide value, even if the company itself is losing revenue. Consumers may be holding off on some purchases during ‘stay-at-home’ or lockdown orders, but many will remember their favorite brands when they regain the opportunity to purchase non-essential goods, making purchasing decisions easier and quicker for the consumer. Consumers also often look to their favorite brands to provide a sense of normalcy and comfort. Healthy and robust IP can help a company revive itself and push forward into the marketplace after the crippling effects of COVID-19 have subsided. Additionally, store-based businesses have been among the hardest hit, and the pandemic has accelerated the need for some companies to transition from a brick-and-mortar retail model to an e-commerce model. A strong brand can bolster the success of such a transition.
The economic downturn we are facing globally as the result of measures taken to fight the spread of COVID-19 has presented an opportunity for many companies to strengthen their brands around support of the wellbeing of the larger community. Some companies have mobilized their strong brand and other IP in this effort regardless of revenue declines and profit losses. These companies are strategically investing in their brand even though the pandemic is making such investments difficult. Some are using targeted advertising and marketing campaigns to connect with consumers, showing consumers that they understand the challenges the world is facing. Additionally, many businesses are sponsoring community service programs or are making donations to give back to their respective communities. However, brand development is not inexpensive, especially when profitability has taken a hit from destabilized distribution channels and decreased revenue. Despite the costs, surveys have found that consumers look favorably upon brands that demonstrate the value of keeping consumers and employees safe, keeping employees on the job, showing empathy to communities, and supporting essential workers.
The survival of these businesses and their IP will depend on their ability to adapt and find new and inventive ways of building and leveraging their brand. The most successful of these brands will find partners and investors that will help them remind consumers that even though times are challenging, they can still rely on their trusted brands.
For example, Ford cut short ads for its redesigned Escape and Explorer models and redirected the airtime to inform viewers of credit programs that can temporarily suspend payment requirements and provide other forms of credit relief. Additionally, Ford informed the market that it is combining forces with others in the marketplace, even competitors, to address the needs of the community. Ford’s repurposing of some production capacity to manufacture much needed medical supplies such as personal protective equipment and ventilators has had a positive impact on the Ford brand. Similarly, wireless phone carrier Verizon pledged to provide an additional 15GB of high-speed data to customers with wireless plans to support families working remotely and students home schooling. Other companies, including banks, are providing extra services and benefits to help families stay connected, support the transition to schooling and working from home, and manage finances through these challenging times.
Despite the current economic challenges, synergistic and financial buyers alike are looking to engage in brand acquisitions, direct investments, partnerships, or sale-leaseback transactions of IP. Buyers are looking to find opportunity within the market by buying brands they feel are currently undervalued. With many businesses suffering financial duress, they are seeking ways to raise funds to endure this downturn. Unfortunately, many have found traditional capital to be limited, creating a need to find a less traditional path to obtain funding to manage the current down market, creating an opportunity for solutions including taking on investors, leveraging their brand as collateral, or an outright sale. Brand transaction opportunities could be a great opportunity for buyers and sellers alike.
As a purchaser and manager of brands, one of the factors that Gordon Brothers looks for in an investment opportunity is a situation where a company maintains a strong brand despite less than optimal business trends. In 2018 Gordon Brothers acquired the Bench brand, finding an opportunity to reinvigorate a strong international brand. In April 2020, Gordon Brothers sold the Bench brand after breathing new life into it. Gordon Brothers also recently acquired the Laura Ashley brand and invested in the Brooks Brothers brand. Authentic Brands Group, WHP Global, and Marquee Brands are also examples of companies that look for opportunities amongst promising brands.
Most retail businesses across the world are now facing the daunting task of reopening amidst a new norm. The survival of these businesses and their IP will depend on their ability to adapt and find new and inventive ways of building and leveraging their brand. The most successful of these brands will find partners and investors that will help them remind consumers that even though times are challenging, they can still rely on their trusted brands.