Intellectual Property value is an increasingly important aspect of managing IP asset in the currently complex and ever changing business world. The three aspected valuation approaches and comments on their application in measuring IP.
Who cares about IP Values?
The following stakeholders are among those who need to ensure the accuracy of IP valuation:
- Banks because their collateral rests in many cases on the underlying IP values of their borrowers.
- Investment bankers private equity funds and merger financier who own or acquire IP
- Taxing authorities whose revenues are generated by transfer of IP assets
- Auditors of public companies
- Finder of fact whether judges or arbitrators and parties to these proceedings.
When is Valuation Necessary?
Valuation is necessary in number of context specific situation including the following:
- In sale, merger, joint venture or similar commercial transaction
- In divorce whether personal or business
- In a bankruptancy
- for estate planning
- When licensing IP
- In Litigation
What are three basic valuation methodologies?
Valuation Analyst and IP professionals believe there are three standards methodologies to value IP,i.e, the cost, the income, and the market based approach. Here we would discuss them in detail:
- The Cost based approach: In this method, whether based on historical or future costs, focus on substitution. This means that the worth or value of IP asset is no greater than the cost to obtain or produce the asset again. The cost can be measured by purchasing the asset today, by replacing the asset with the substitute of equal quality or by creating an absolute reproduction of asset. IP cost measurement includes: direct cost, such as material, designs, marketing, legal, personnel, and engineering, soft and indirect costs such as development time, overhead costs and profit percentage for the developer of the assets.
- The Market Approach: It is applicable when a truly active marketplace exists and actual comparable transaction can be found. But until this decade most IP asset, were not being brought, sold, or licensed frequently enough to establish a value based solely on direct market based comparable. Therefore it is often necessary for an experienced IP valuation expert to adjust and analyse existing comparables to arrive at an accurate value. Further, in selecting a suitable comparable transaction one must focus on the context in which it took place, was the transaction in bankruptcy filing, a divorce, an estate settlement,litigation or perhaps a forced transaction or divestiture? Any one of these may render a specific comparable transaction unsuitable for analysis unless one makes a compensating adjustment to the transaction. But when reliable data is available, the market approach is considered the most direct and systematic method for accurately valuing intangible assets such as IP.
- The Income Approach: This is perhaps the most widely used IP valuation approach. It is based on the assumption that the value of piece of IP today result from the financial benefits that can be generated and estimated the future for whatever remaining expected useful life the IP may contain. The income approach requires substantial knowledge and judgement on the part of valuation analyst to decide the key issue: how to measure the income attributable from the asset . Is income going to be measured by some theoretical royalty or rent to be received? Will the income be measured as the premium price commanded by the products using the IP? Or will it be measured as some portion of the operating income of a company’s overall operations or for a specific technology or brand?Whatever the method of valuation chosen, IP can have multiple values at the same time and all those values can be correct simultaneously. That’s because, unlike real estate, IP can have vastly different values depending on who owns it and how they intend to use it.
Which Valuation Approach Should you use?
The answer depends on four factors;
- How unique is the asset
- How much data is available and verifiable
- What is the context, purpose or objective of analysis
- The judgement of analyst which is based on extensive earlier experience
A part thought: as the world continues to evolve and expand the blurring of of IP will increase. For example, software may now be patent, copyright and trademark protected. This blurring will only increase the complexity and challenge of IP valuation.