Sale-to-Service

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Sale-to-Service®[1], also known as an S2S®, is a patent-pending (investment) origination process and investment structure in which a business sells its mission-critical[2], server-based, intangible assets[3],[4] and enters into a contract (services agreement [5][6]) for ongoing access to and use of the sold assets[7]. The Sale-to-Service® and S2S® terms are registered trademarks created to distinguish a Sale-to-Service® from sale-leasebacks[8] and operating leases[9] of tangible asset[10] and intellectual property[11] (IP) sale-license backs[12].

Service Economy

Much of the world’s economic activity has transitioned from an asset-intensive industrial economy to an asset-light service economy[13]. Ocean Tomo[14], an intellectual capital merchant bank’s study on intangible asset value determined that physical or tangible assets comprised more than 80% of the S&P 500 Market Value in 1975 but in just 40 years the percentages had reversed[15]. A key driver of this growth can be found in the use of technology and data, which are also described as mission-critical, server-based, intangible assets.[16][17]

Mission-Critical Server-Based Assets

Mission-critical server-based intangible assets generally take four different forms:[18]

  • Software as a Service (SaaS): This software sits on the software provider's servers and cannot be moved from that location[19]. Examples include Salesforce, NetSuite, Microsoft Dynamics, and Shopify.[20] SaaS businesses in and of themselves are not a fit for a Sale-to-Service® but a SaaS solution used by an operating business may be a mission-critical depending on the level of customization specific to the business.[21]
  • Premises-based Enterprise Resource Planning (ERP): ERP is licensed software for which the customer can decide where to host the technology.[22] Hosting can be on servers owned by the company, in a data center, or in the cloud[23] which includes hosted solutions on Amazon Web Services or Microsoft Azure.[24] Examples of larger ERP providers include SAP, Oracle, and Epicore.[25]
  • Proprietary Systems[26]: These server-based assets are unique to the company.[27] Companies with proprietary systems are often described as tech-enabled.[28] These server-based assets can sit on servers owned by the company, in a data center, or the cloud.[29]
  • Data: In the context of a Sale-to-Service®, information that sits in a data center or the cloud is also a server-based intangible asset.[30] Data is often essential to a company’s operations[31] and examples include SKU, invoice, tracking, customer ID, and regulatory information or other data that is essential for the company to deliver its products or services to its customers.[32]

Sale-to-Service and Valuation

Mission-critical, server-based, intangible assets generally have little to no value on a company’s balance sheet[33] but these assets contribute to enterprise value.[34] In an acquisition, the value of these intangible assets is often attributed to goodwill. A Sale-to-Service® values these assets not based on their book value but based on their contribution to enterprise value.[35]

Sale-to-Service® vs Sale Leaseback and Operating Leases

Physical control of the assets and payment contingent on service are two primary items that distinguish a Sale-to-Service® from a sale leaseback and operating lease.

Physical Control: In traditional sale-leasebacks and operating leases, the leasee has physical possession and control of the leased tangible asset, often real estate or equipment.[36] In a Sale-to-Service®, the customer does not have physical control of the assets[37] because the assets are intangible[38][39] and reside on a server generally in a data center or in the cloud.[40]

Services Agreement[41]: In traditional sale-leasebacks and operating leases, payment to the lessor is largely if not entirely fixed.[42] In a Sale-to-Service®, payments are contingent on the performance of a service, and if the service is not delivered, payment is not due.[43]

Sale-to-Service® vs Intellectual Property (IP) Sale License-Back[44]

An intellectual property sale license-back financing is similar to a real estate sale-leaseback where there is an ownership change but rather than a lease, the seller pays a license fee or royalty fee for ongoing use of the intellectual property asset.[45] A Sale-to-Service® is similar to an intellectual property sale license-back but rather than paying a license fee or royalty fee for ongoing use of the assets, the seller pays a service fee which is contingent on the performance of a service, and if the service is not delivered, payment is not due.[46]

S2S®

S2S® is an abbreviated term for Sale-to-Service® and is a registered trademark.

Leeward Capital Management, LLC

Leeward Capital Management,[47] a Dallas, Texas-based specialty finance business, has exclusive use of the patent-pending Sale-to-Service® origination and investment structure and use of the Sale-to-Service® and S2S® trademarks.

Refrences

  1. ↑ "Sale-to-Service: How it Works & FAQs". Leeward Capital Management. Retrieved 2021-01-05.
  2. ↑ "What is a Mission Critical System? - Definition from Techopedia". Techopedia.com. Retrieved 2021-01-05.
  3. ↑ Tech, G. B. (2020-01-17). "Mission-critical systems, and why you need them managed". GB Tech. Retrieved 2021-01-05.
  4. ↑ "Mission Critical Systems vs. Business Critical". NetMotion Software. 2019-07-16. Retrieved 2021-01-05.
  5. ↑ "Sale-to-Service: How it Works & FAQs". Leeward Capital Management. Retrieved 2021-01-05.
  6. ↑ "Is the Service Contract the new Operating Lease?". Monitordaily. Retrieved 2021-01-05.
  7. ↑ "How an S2S Works - YouTube". www.youtube.com. Retrieved 2021-01-05.
  8. ↑ Tardi, Carla. "Leaseback Definition". Investopedia. Retrieved 2021-01-05.
  9. ↑ Tardi, Carla. "Operating Lease Explained". Investopedia. Retrieved 2021-01-05.
  10. ↑ Murphy, Chris B. "How Do Tangible and Intangible Assets Differ?". Investopedia. Retrieved 2021-01-05.
  11. ↑ Kenton, Will. "Intellectual Property". Investopedia. Retrieved 2021-01-05.
  12. ↑ "Sale and Leaseback – a model for increasing trust in IP assets? | Metis Partners". Retrieved 2021-01-05.
  13. ↑ Staff, Investopedia. "Service Sector Definition". Investopedia. Retrieved 2021-01-05.
  14. ↑ "Ocean Tomo | The Intellectual Capital Merchant Banc™ Firm". Ocean Tomo. Retrieved 2021-01-05.
  15. ↑ "Intangible Asset Market Value Study". Ocean Tomo. Retrieved 2021-01-05.
  16. ↑ Witt, Ulrich; Gross, Christian (2020-04-01). "The rise of the "service economy" in the second half of the twentieth century and its energetic contingencies". Journal of Evolutionary Economics. 30 (2): 231–246. doi:10.1007/s00191-019-00649-4. ISSN 1432-1386.
  17. ↑ "What Are the Causes of Rapid Growth in the Service Industry?". Small Business - Chron.com. Retrieved 2021-01-05.
  18. ↑ "Leeward's Sale-to-Service® Investment Criteria & Transaction Types". Leeward Capital Management. Retrieved 2021-01-05.
  19. ↑ Timmins, Joseph. "What's Your Definition of Software-as-a-service (SaaS)?". www.teamacuity.biz. Retrieved 2021-01-05.
  20. ↑ "Top 75 SaaS Companies 2021". www.datamation.com. Retrieved 2021-01-05.
  21. ↑ "Leeward's Sale-to-Service® Investment Criteria & Transaction Types". Leeward Capital Management. Retrieved 2021-01-05.
  22. ↑ "Cloud ERP vs. On-Premise ERP". Software Advice. 2020-12-04. Retrieved 2021-01-05.
  23. ↑ Kavis, Mike. "Cloud's Next Big Wave: Mission Critical Applications". Forbes. Retrieved 2021-01-05.
  24. ↑ March 6, Jesus Vigo in Cloud on; 2020; Pst, 11:55 Am. "Mission-critical services migrating to the cloud in 2020". TechRepublic. Retrieved 2021-01-05.{{cite web}}: CS1 maint: numeric names: authors list (link)
  25. ↑ February 12, Hope Reese in CXO on; 2020; Pst, 8:30 Am. "Top 10 ERP vendors in 2020". TechRepublic. Retrieved 2021-01-05.{{cite web}}: CS1 maint: numeric names: authors list (link)
  26. ↑ Kenton, Will. "Reading Into Proprietary Technology". Investopedia. Retrieved 2021-01-05.
  27. ↑ "Proprietary Software Definition". techterms.com. Retrieved 2021-01-05.
  28. ↑ "What Does it Mean to be a Tech Company vs. Tech-Enabled?". MediaTech Ventures. 2020-07-13. Retrieved 2021-01-05.
  29. ↑ "On-Premises Data Centers vs. Cloud Computing – Enterprise IT Definitions". www.hpe.com. Retrieved 2021-01-05.
  30. ↑ Saxena, Asha (2019-03-18). "What is Data Value and Should it be Viewed as a Corporate Asset?". DATAVERSITY. Retrieved 2021-01-05.
  31. ↑ "Recognizing Enterprise Mission-Critical Assets".{{cite web}}: CS1 maint: url-status (link)
  32. ↑ "Your Data: How to Decide What's Mission-Critical". www.ironmountain.com. Retrieved 2021-01-05.
  33. ↑ Posted by Prashanth Southekal, PhD on May 15; Blog, View. "Why is Data Missing from the Balance Sheet?". www.datasciencecentral.com. Retrieved 2021-01-05.
  34. ↑ Wagner, Dante Disparte and Daniel. "The enterprise value of data and digital transformation". www.theasianbanker.com. Retrieved 2021-01-05.
  35. ↑ "Sale-to-Service: How it Works & FAQs". Leeward Capital Management. Retrieved 2021-01-05.
  36. ↑ "A Refresher on Accounting for Leases". The CPA Journal. 2016-01-13. Retrieved 2021-01-05.
  37. ↑ "Sale-to-Service: How it Works & FAQs". Leeward Capital Management. Retrieved 2021-01-05.
  38. ↑ "IFRS". www.ifrs.org. Retrieved 2021-01-05.
  39. ↑ Morah, Chizoba. "How Is Computer Software Classified as an Asset?". Investopedia. Retrieved 2021-01-05.
  40. ↑ "Survey: 93 Percent of Organizations Use Cloud-Based IT Services". Press Center. 2016-03-08. Retrieved 2021-01-05.
  41. ↑ "Is the Service Contract the new Operating Lease?". Monitordaily. Retrieved 2021-01-05.
  42. ↑ Kenton, Will. "How Lease Payments Work". Investopedia. Retrieved 2021-01-05.
  43. ↑ "Sale-to-Service: How it Works & FAQs". Leeward Capital Management. Retrieved 2021-01-05.
  44. ↑ "Sale and Leaseback – a model for increasing trust in IP assets?".{{cite web}}: CS1 maint: url-status (link)
  45. ↑ "IP sale and leaseback transactions | Sibanda & Zantwijk Patent Attorneys". snz.co.za. Retrieved 2021-01-05.
  46. ↑ "Sale-to-Service: How it Works & FAQs". Leeward Capital Management. Retrieved 2021-01-05.
  47. ↑ "Low-Cost Non-Dilutive Capital for Closely-Held Transactions". Leeward Capital Management. Retrieved 8 January 2021.
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