Trademarks Can Be a Collateral Opportunity for Asset-Based Lenders, Advises Tiger Group Managing Director
But product scope, distribution challenges, brand recognition, celebrity endorsers’ bad behavior, IP issues and other unusual variables can affect trademark health and NOLV, Eric Gul cautions in article.
NEW YORK, May 23, 2022 /PRNewswire/ — Trademarks present a collateral opportunity for asset-based lenders—so long as their due diligence covers the unique legal and business risks associated with this collateral, writes Eric Gul, a Managing Director at Tiger Group, in an article for TSL Express, the daily e-newsletter of The Secured Finance Network (SFNet).
“Evaluating trademarks is not the same as appraising retail and wholesale inventories, M&E or real estate,” he writes. “The organizing principle of the due diligence process is to ask the simple question, ‘What can we fall back on if the borrower defaults?'”
Known for its asset-valuation, disposition and finance services, Tiger Group is increasingly engaged in projects involving trademarks, brands and IP. Gul, who has over 20 years of experience in this area, joined Tiger earlier this year.
In addition to TSL Express, his primer on trademark opportunities and risks (“The art and science of loaning against trademarks”), is also expected to run in an upcoming print edition of The Secured Lender, the official publication of SFNET (formerly known as the Commercial Finance Association).
Gul begins the piece by reviewing standard review criteria, such as:
- checking the USPTO database to confirm that the marks are properly registered and uncontested;
- uncovering any outstanding liens or litigation involving the mark, such as legal claims hinging on efficacy, safety or trademark-infringement; and
- understanding any licensing, distribution or “live and let live” agreements (with similar brands) that may apply to the borrower’s trademark.
For brands sold outside the United States, Gul notes, additional reviews may be justified. “In certain major-market countries, so-called ‘squatters’ often swoop in and file legal claims of ownership to popular U.S. brands,” he writes. “Remedying this via litigation tends to be long and expensive, with uncertain outcomes.”
Gul also offers potential considerations related to the big-picture positioning of brand collateral. “What makes the brand special? What does it stand for?” he writes. “To what degree does it face competition from national or private-label brands? What are its growth prospects? How resilient is it likely to be if consumer spending patterns and markets undergo major shifts?”
Some brands are a natural fit for a wide array of brick-and-mortar and online distribution channels, Gul observes. As such, they are a bit like a smartly diversified stock portfolio. Others, though, may be sold through just a single channel, and are more vulnerable should that chain decide to drop them. Likewise, not every brand has earned a place in consumers’ hearts in a way that adds substantial monetary value. “It is one thing to own the trademark of an instantly recognizable top seller, but another to own the functional equivalent of a private-label knockoff of that product … lenders need to be careful to avoid an overly optimistic appraisal.”
In reviewing the borrower’s P&L, the team should pay particular attention to any sales declines, flat sales, indications of slowing growth and/or any unusual spikes. “A classic example of the latter would be the ‘Covid-19 bump’ enjoyed by a raft of product categories in 2020 and 2021,” Gul notes.
And for some brands, the involvement of celebrities can be a source of both value and risk. “Any type of negative activity by that individual endorser could potentially cause harm to the perception, market acceptance, and value of that borrower’s brand,” Gul writes.
Due diligence should therefore include close scrutiny of any prevailing morals clauses in the endorsement agreement. These highly negotiated provisions need to be drafted as tightly as possible, Gul advises.
In the conclusion, he describes lending against trademarks as both an art and science. The latter hinges on straightforward procedures and best practices. By contrast, those who are proficient in the “art” of assessing brand value tend to live and breathe subjects that may seem wholly unrelated to the ABL world, Gul writes. “Those who love brands and pop culture the most often bring the best insights into where this collateral may be headed.”
The full article is available at: https://bit.ly/3NlMvXq
