IP Valuation: Everything you should know
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 an IP valuation to determine the worth of the IP assets in question if you intend to buy, sell, or license IP.
They are protected by the law, and that protection can be upheld in court. IP assets are transferable, have a shelf life, and can be independently identified. Therefore, startups need to better understand IP valuation and how having it will greatly benefit their company. In this article, we will deep dive into everything you should know about IP valuation.
Types of Intellectual Property
There are a total of 4 types of intellectual property, namely trademarks, copyrights, trade secrets, and patents.
- 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– Copyrights are a form of protection given to the creators of original works of authorship, both published and unpublished. Copyrights are among the most commonly employed types of IP. 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.
Why should you value intellectual property?
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:
- For license and franchise – When licensing in or licensing out IP, 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. Both the franchisor and the franchisee must have a clear understanding of the worth of the trademark(s), trade secrets, and other IP assets while engaging in franchising.
- 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. In addition, intellectual property valuation offers strategic advice for managing expenses associated with international filing and prosecution, line extensions, brand extensions, and new product development.
- Get funding – For a public firm, an IP valuation supports share prices, communicates the value of its IP 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 – One should conduct a comparative analysis of the worth of the IP assets involved in each option before considering going into a joint venture or other types of strategic partnerships. The parties involved should be aware of IP assets’ value when designing a joint venture agreement. The same is true of a strategic partnership since both sides would be well-positioned to profit from the arrangement provided they were both aware of the financial as well as the technological significance of the IP assets.
- 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 parties can make educated decisions about the acceptable cost of capital or the financial leverage strategy to be used for IP valuation. The value and share price of the resulting firm are also favorably impacted. 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 – Whether the IP assets are core or non-core to the business, when an enterprise owns IP assets but is not using them in its core business or is not effectively licensing them out, it should think about donating those IP assets because, in some countries, donating IP assets may result in significant tax benefits. 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.
- Liquidation – When an organization is in the phase of liquidation, the valuation of its IP assets plays a critical role. In this context, 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, such as intellectual property (IP) assets, and mandates that all acquired IP assets be recognized as assets, separate from goodwill, on the business’s balance sheet acquiring the IP assets. For instance, IP valuation is performed when a brand is acquired for both the initial valuation and the ongoing impairment tests so that the determined values can be included in the balance sheet.
- 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. In third-party transactions, as well as internal tactics like cross-border transfer pricing and centralizing the ownership of IP assets in IP holding companies, IP assets offer a variety of alternatives for tax optimization.
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:
Factors to consider before valuation of IP
An intellectual property asset must fulfill the following requirements in order to be valued:
- It has to be distinct from other things (subject to specific identification and with a recognizable description)
- There should be physical proof that the asset exists, such as having a contract, a license, a registration document, or a record in financial statements
- It needs to have been produced at a specific time
- It needs to be transferable and enforceable by law
- Its revenue stream must be distinct from and isolated from that of other corporate assets
- It ought to be able to be sold separately from other corporate assets
- At a specific time, it should be liable to termination or destruction
Methods to value IP assets
The main approaches for valuing IP assets include:
- Income method – The most popular approach for valuing intellectual property is the income method. The IP asset is valued based on the anticipated economic income it will produce and its current market worth. This approach can be applied most easily to IP assets with positive cash flows, those whose future cash flows can be reasonably predicted, and those for which the discount rates can be calculated using a risk proxy.
- Cost methods – The cost method determines the value of an IP asset by figuring out how much an identical (or comparable) IP asset would cost. The cost method is particularly helpful when the IP asset is easily duplicable and when it is difficult to precisely estimate the asset’s economic benefits. The asset’s distinctive or novel properties are not taken into account by this method, nor are wasted expenditures taken into account.
- Market method – The market technique 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. This approach is popular for establishing approximations of values to be used in figuring out royalty rates, taxes, and inputs for the income technique since it is straightforward and based on market data.
Challenges you may face in IP valuation
While establishing risk management strategies to handle the issue requires the execution of certain programmatic fundamentals, such as defining the value of its IP and then detecting, measuring, and evaluating risk consequences, IP risk can occasionally be a cloudy and ambiguous topic. With this foundation in place, organizations are better able to concentrate on effectively implementing mitigation programs by securing the required levels of leadership commitment, coordinating the program with strategic objectives, publishing policies, and standards to establish the program framework, reviewing network architecture, and investing in education and training.
The realities of the modern corporate world necessitate a thorough effort at risk mitigation and valuation in order to achieve the upside potential of an organization’s intellectual property, despite the difficulty of such efforts. Therefore, challenges in IP valuation should always be treated with utmost caution and sound management, considering the organizational requirements and assets in question.
How to maximize your IP valuation?
The use of IP assets to generate revenue is more than just a short-term tactic. Strong IP assets boost a company’s prospects of success by attracting more investment, lowering its risk of bankruptcy, and improving its chances of a successful exit through an IPO.
Why choose experts to value your IP assets?
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. There are numerous businesses that offer support and consultation for it. With our qualified experts, Eqvista provides a high-end service on your valuation. For any assistance, give us a ping.