BC Business
How do you put a price on a Phyllis? | BCBusiness"How do you put a price on a Stanley, a Phyllis, or an Oscar?" asks Michael Scott.
Businesses looking to expand are wise to consider the intangibles. As Canadian companies grow and face ownership transitions, many of them will have to find creative financing solutions. This is particularly true in B.C., where a lot of companies are focused on distribution or services in such areas as architecture, healthcare, marketing and engineering. These companies often don’t have a large base of fixed assets to leverage.?
How do you put a price on a Phyllis? | BCBusiness“How do you put a price on a Stanley, a Phyllis, or an Oscar?” asks Michael Scott.
As Canadian companies grow and face ownership transitions, many of them will have to find creative financing solutions. This is particularly true in B.C., where a lot of companies are focused on distribution or services in such areas as architecture, healthcare, marketing and engineering. These companies often don’t have a large base of fixed assets to leverage.
While some assets – real estate, accounts receivable, equipment and inventory – are considered “tangible,” others are harder to valuate. A business’s intangible assets might include trademarks, patents, research and development, and goodwill, as well as such things as customer relationships, brand, proprietary technologies, market share and reputation. Goodwill can be thought of as the difference between the value of a company’s assets, and what the business is valued at – or sold for.
Intangibles become especially important when a business encounters situations where it needs to finance above and beyond the value of its tangible assets – something that’s not always available through traditional bank financing. Traditional lending is typically based on the borrower providing collateral in the form of tangible assets, and the bank, assuming its lending criteria are met, lending a certain percentage of the value of those assets.
In a lot of situations, however, a business has to finance above and beyond the value of its tangible assets. For example, a company might face a transition, such as an acquisition, an ownership succession or a buyout. Beyond these scenarios, a business might be looking to expand or enter a high-growth phase, which can’t be supported with traditional lending.
Faced with any of these circumstances, and because a business is often wise to preserve working capital for day-to-day operations, a company will need to look for a creative lender that will leverage both tangible and intangible assets. Such a lender will take a lot of factors into account. Ultimately, a big part of lending criteria for financing intangibles is based on current and future profitability of the business.
One of the first intangibles a lender might look for is the quality of a company’s management. This means a management team with complementary skill sets in sales, HR, logistics, technology and accounting. Each executive’s background will be taken into account, including education and success in both the current business and past businesses. Lenders might look at situations such as the economic downturn in 2008 and 2009 for examples of management’s value to the company. (Some management teams did nothing, hoping for the best while profits disappeared; others took immediate steps to preserve or even improve their results.) This is the kind of evidence a lender will look for because, when you’re lending against intangibles, the only thing you can hang your hat on is profitability, which is in part driven by a strong management team building a competitive advantage for the business.
Another vital intangible is a solid business plan that includes an analysis of the company’s strengths, weaknesses, threats and opportunities. Understanding your market and your business’s positioning is critical. Price alone is not a sustainable competitive advantage because in time someone else can always find a way to make it (or do it) more cheaply.
Beyond the quality of the management and a solid business plan, two other key intangibles are a diversified customer list and quality information systems that provide timely, accurate information to management.
Ultimately, any business looking to access creative financing must take the necessary steps to build a solid foundation. Not only will this result in a stronger business; it will pay off by opening the door to innovative financing structures from flexible lenders with solutions to match.
Derek Strong is the director and district manager for Roynat Capital in B.C., a provider of creative financing.