Consider the intangibles.

• Author: Goupil, Denis
• Position: FINANCE - Viewpoint essay

As Canadian companies face growth, expansion, and ownership transitions, many of them will have to find creative financing solutions to achieve their financial goals. This need is evident in Northern Ontario which has many manufacturing, fabrication, service, transportation and wholesale distribution focused companies in industnes such as mining, forestay, construction, health care and engineering. While finding the right financial partner is always key, some of these companies have the particular challenge of often not having the necessary fixed assets to leverage.

While assets such as real estate, accounts receivable, equipment and inventory are considered 'tangible,' 'intangible' assets 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.

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'Intangibles' become especially important when a business encounters situations where it needs to finance above and beyond the value of its tangible assets -- something traditional bank financing does not 'always do. Traditional lending is typically based on the borrower providing collateral in the form of tangible assets, and the bank, assuming their lending criteria is met, lending - a certain percentage of the value of those assets.

There are many situations, however, which would require a business to finance above and beyond the value of its tangible assets: consider a company facing a transition such as an acquisition, an owner ship succession issue or a buyout. Beyond these scenarios, a business might be looking to expand or enter a high growth phase which cannot be supported with traditional lending.

Faced with any of these circumstances, and because a business is often wise to preserve its working capital for day-to-day operations, it will need to look for a creative, flexible and possibly a more patient partner to finance their growth. A frequent situation that lenders encounter is the case of good will financing in ownership transitions. For example, if a mining service company wanted to purchase a competitor, a suitable financing structure might give value to the machinery and equipment being acquired, but also recognize the value of the target company in excess of its tangible assets. In a situation such as...