IP Valuation: Everything you should know
The intellectual property (IP) valuation market in the United States has shown massive growth in 2023. According to Fortune Business Insights, the U.S. Patent and Trademark Office reported significant patent activity, with over 515,000 new applications received and around 340,000 patents granted in FY 2023, reflecting a robust demand for IP management tools.
The process of calculating the worth of intellectual property assets, such as patents, trademarks, copyrights, and trade secrets, is known as intellectual property valuation (or IP valuation). You must do a valuation to determine the worth of the assets in question if you intend to buy, sell, or license IP.
The IP valuation market in the U.S. is not only substantial but also assured for considerable growth across multiple segments,driven by technical advancement and increasing patent activity. In this article, we will deep dive into everything you should know about IP valuation.
Importance of IP Valuation
The intellectual property management software is valued at USD 8.9 billion in 2023, and is expected to grow at a CAGR of 13.5% from the current market to 2032. IP assets offer various tax optimization alternatives in third-party transactions and internal tactics, such as cross-border transfer pricing and centralizing the ownership of IP assets in holding companies.
The increasing demand for patent filings and need of effective management solutions are the Key driving factors for the growth of the IP market. Further to this rise in innovation and R&D spending across various industries like IT, healthcare and telecommunications fuels the need for sophisticated IP management solutions.
Understanding the importance of IP valuation is essential for business. Here we listed out few important features:
- Decision making – Accurate IP valuation is crucial during mergers and acquisitions .This helps buyers to determine the fair pricing for intellectual assets involved, that will help in the success of transaction. When licensing IP, knowing it’s value provides a solid foundation for negotiations, ensuring equitable terms and compensation.
- Financial insights – By demonstrating the value of IP assets, startups and SMEs looking to leverage their IP can enhance the investor confidence, making it easier for them to secure funding or attract Venture capital. Also valuing IP can have significant tax implications during intercompany transactions and ensure compliance with international tax laws.
- Risk Management – In order to ensure fair outcomes accurate valuation is important, also by understanding the financial value of IP can determine the damages awarded in case of infringement or legal disputes.
Types of Intellectual Property
There are a total of 4 types of intellectual property, namely trademarks, copyrights, trade secrets, and patents.
| Types | Definition | Types/Example |
|---|---|---|
| Patents | Exclusive right for inventions | |
| Copyrights | Protection for original works of authorship | Literary works, music and art, software and films |
| Trademarks | Signs or symbols that identify products/services. | Brand names, logos and slogans |
| Trade Secrets | Confidential business information | Formulas (e.g.,Coca-Cola), processes and customer lists. |
Read to know more about the conditionings for gaining IP rights.
You find the detailed information of table below:
- Trademarks – A trademark is “any term, name, symbol, device, or any combination used, or intended to be used, in commerce to identify and distinguish the goods of one manufacturer or seller from goods manufactured or sold by others,” according to the U.S. Patent and Trademark Office (PTO). The Trademark Law Treaty Implementation Act offers some worldwide protection for trademarks that are registered in the United States, albeit it is not as comprehensive as the international protection framework for copyrights.
- Copyrights – Copyrights are a form of protection given to the creators of original works of authorship, both published and unpublished. Instead of protecting the concept or subject matter, copyright guards a physical form of expression (such as a book, piece of art, or music). Under the original Copyright Act of 1909 in the United States, the publication was typically necessary to establish federal copyright. The Copyright Act of 1976 altered this condition, and as a result, any original work of authorship is now protected by copyright as soon as it is generated in a tangible form.
- Trade secrets – Trade secrets include any concept or piece of information that a corporation chooses not to share. A trade secret differs from other types of IP in that it has no set expiration date; an issue may stay secret only while applying for a patent, or it may be zealously guarded throughout the duration of the business.
- Patents – Patents rank among the most valuable, pricey, and challenging to acquire forms of intellectual property. The PTO defines a patent as “the grant of a property right to the inventor” giving that person “the right to prohibit others from creating, using, offering for sale, selling, or importing the invention”.
New technologies or business procedures are examples of patentable objects or processes, but more abstract items like websites or ideas are not. The grant is normally valid for 20 years from the date of application if the applicant provides sufficient paperwork and the PTO confirms the grant’s originality.
Intellectual Property Rights
The evolution of company models where IP is a key component in establishing value and prospective growth has been driven by changes in the global economic environment. Along with these systemic developments, the U.S. and international accounting standards put pressure on businesses to identify and value all of their measurable intangible assets as part of a transaction.
These trends have made effective intellectual property valuation, followed by steps to secure that value, a crucial component of the success and profitability of a contemporary organization. At the recent “New Building Blocks for Jobs and Economic Growth” conference, where Federal Reserve Chairman Ben Bernanke spoke about the significance of intangible capital and how its accumulation has been responsible for more than half of the increase in the U.S. output-per-hour over the past several decades, provided support for this idea. Following are a few reasons which state the importance of IP valuation:
Legal Protections
- For license and franchise – When licensing in or licensing out, especially when calculating fair and substantial royalty rates, an in-depth understanding of the IP Assets ensures informed discussion and decision-making regarding the terms and conditions.
- Settling disputes – Budgeting and resource allocation decisions are aided by IP valuation. For instance, a business may need to reconsider its R&D strategy and procedures if it is spending a lot of money on internal R&D but is falling behind rivals as a result of slow or delayed product releases.
Strategic Business Asset
- Get funding – For a public firm, an IP valuation supports share prices, communicates the value of its assets to capital markets, and aids in raising money from investors. For documentation related to initial public offerings (IPOs), IP asset valuation is also necessary.
- Recruit partners – Before entering a joint venture or strategic partnership, it’s important to compare the value of the IP assets involved. This knowledge is essential for designing agreements and ensuring both parties benefit from the arrangement.
- M&A (Merger and Acquisition) – The value of the target company’s IP assets is the main justification for considering an M&A deal. The IP value method is enunciated in the strategy of top-tier corporations like the Volkswagen Group and Tata Group to adopt brands. Audi, Bentley, Skoda, Lamborghini, Bugatti, Porsche, and many other well-known brands are owned by the Volkswagen Group. Jaguar and Land Rover are owned by Tata Group.
- Donating IP assets – It’s crucial to value these IP assets in order to determine the tax benefit. The tax authorities would not be interested in knowing how any donated intellectual property was valued, but they may also set guidelines for determining such values.
Economic Incentives
- Liquidation – When an organization is in the phase of liquidation, the company will need to determine its value based on how many assets and liabilities they have to pay for its disposal. As a result, a liquidation plan will require the IP assets to be valued.
- Finance Reporting – The accounting community has begun to handle IP assets differently when it comes to financial reporting as a result of the growing acknowledgment of the contribution of IP assets to the total market value of businesses. The International Accounting Standards Board (IASB) now recognizes acquired and identifiable intangible assets on the business’s balance sheet acquiring the IP assets.
- Tax optimization – A company’s assets, including its intellectual property assets, must be appraised in order to come up with measures to reduce the amount of tax that must be paid. IP assets offer various tax optimization alternatives in third-party transactions, as well as internal tactics like cross-border transfer pricing and centralizing the ownership of IP assets in holding companies.
The foundation for any value determination utilized when assigning portions of the purchase price associated with the acquisition of a firm is something that the Internal Revenue Service or other tax authorities would like to know as much as possible about.
When should you value your IP assets?
You should assign a value to an IP asset when you would like to sell, license, or enter into any commercial agreements based on IP. The internal management of IP assets, the enforcement of IP rights, and numerous financial procedures can all benefit from IP value.
How to value intellectual property?
You can value IP and IP rights using a variety of techniques. These can be divided into three groups: market-based, cost-based, and income-based approaches, which will be explained below. However, before moving forward, here is a list of factors that should be considered when valuing IP assets:
Intellectual property valuation methods
The main approaches for valuing IP assets include:
Income method
Income method is the most accepted approach in the valuation of intellectual property. The IP asset is valued based on the projected monetary cash flow that will result from it in the future and cost worthy benefits expected from it.
The income-based approach involves the estimation of probable future income, risks, and costs associated with the IP. These are used in calculating the IP’s net present value (NPV); this will be positive NPV or negative NPV. Of the income-based methods, three are the most utilized, namely the discounted cash flow, capitalization of earnings, and relief from royalty.
For example, a company owns a patent that is expected to generate $1M additional revenue for next 5 years, we can calculate its Net Present Value (NPV) by discounting it at 10% as shown below:
| Year | Future Cash Flow (CF) | Discount Factor (1 + r)^t | Present Value (PV) = CF / Discount factor |
|---|---|---|---|
| 1 | $1,000,000 | 1.1 | $909,090.91 |
| 2 | $1,000,000 | 1.21 | $826,446.28 |
| 3 | $1,000,000 | 1.331 | $751,314.80 |
| 4 | $1,000,000 | 1.4641 | $683,013.45 |
| 5 | $1,000,000 | 1.61051 | $620,921.32 |
| Total NPV | $3,790,786.76 |
Cost method
The cost method calculates the value of an IP asset by finding out the cost of creating it. It may also be estimated based on similar reasons as when determining how much an identical (or a similar) IP asset would cost.
This involves direct costs, such as research and development, patent filing fees, legal fees, and indirect costs which include opportunity costs, risk premiums, and overheads. The cost approach presumes that an ideal buyer will not pay more than the cost of creating or replacing it with a comparable one.
For example; we consider a pharmaceutical company that wishes to make a patent application. In accordance with the Cost Method, its total costs shall be calculated. This includes research and development costs of $100,000; patent filing costs of $30,000; legal fees of $20,000, and the total amounting to $150,000.
Market method
The market method is based on an evaluation of the actual cost incurred for the transfer of ownership of a comparable intellectual property asset in a comparable setting.
It is also known as the transactional method, which is quite literally the price a willing buyer would pay to acquire a similar asset in the same conditions, or the true price of the subject IP if the person performing the appraisal has sufficient data to determine it. The two most frequently used valuation standards, including ‘fair market value’, and ‘arm’s length standard’ have been deduced from this approach.
If a company wants to value its patent, using the market method, it would look out for transactions of similar patents in the same industry. If a comparable patent in the same industry was sold for $5 million, this would be the estimated value of the company’s patent based on the Market method.
Empowering Growth Through Eqvista’s Accurate IP Valuation!
IP valuation has never been given the attention it merits. The extent to which a company values and leverages its IP Assets is one element that determines whether it succeeds or fails. The process of valuation is complicated, and the assets must be assessed by qualified experts.
Eqvista offers Intellectual property valuation services designed to help startups, businesses and investors accurately assess the value of intangible assets, including patents, trademarks, copyrights and trade secrets. For businesses looking to maximize their intellectual property’s potential, Eqvista’s services offer a pathway to understanding and leveraging the value of their intangible assets effectively.
With our qualified experts, Eqvista provides a high-end service on your valuation. For any assistance, give us a ping.
