Intellectual property (IP) is any intangible asset that can be assigned individual economic value. IP assets may include designs, patents, trademarks, copyright, and trade secrets. If you are planning to buy, sell, license, or partake in any commercial transaction involving IP, or if your company is on either end of a merger and acquisition process, then it’s important to understand IP valuation and the different valuation methods to gain an accurate perspective on the real-world value of your IP.
Valuing Intellectual Property Assets
The World Intellectual Property Organization (WIPO) identifies two main characteristics of IP valuation: exclusivity and future benefits. Let’s take a closer look at each.
The right of an asset’s owner to exclude competitors from using it, such as a patent on a process or design, is known as exclusivity, and establishes its base value. The asset should both generate a measurable amount of economic benefits, as well as enhance the value of other associated assets held by its owner, in order to have a quantifiable value.
The second major component of IP valuation is the potential future cash flows, royalty rates, or other economic benefits to the owner or licensed user. This includes direct exploitation of IP via integration within products (such as a software feature or hardware component), sale of the IP or licensing agreements, or other benefits.
IP valuation basics
At its most basic, IP valuation is the process of assigning a monetary value to intellectual property assets. The intangible nature of IP means that making an accurate assessment of its value depends on a wide variety of potential factors. IP can be difficult to define and harder to value or price fairly.
IP value can change over time–for example, it may change as the value of the underlying asset shifts in relation to market conditions, technological innovation, or the uniqueness of the IP. Changing regulatory environments may also affect the value of IP. When evaluating a given asset, you must be able to compare its value to a similar IP asset, and make sure the data you have is adequate and reliable.
Why conduct an IP valuation?
IP valuation is beneficial for selling or licensing assets, entering into other commercial arrangements, or for buying/selling a business with its own portfolio of intellectual property. Knowing IP assets’ values is important for enforcement of your rights, and for assessing damages in case of an infringement. Various financial processes and internal management of IP assets also benefit from accurate valuation.
According to WIPO, to value an IP asset, it should meet the following prerequisites:
- Be uniquely identifiable
- Show tangible evidence of its existence
- Have an identifiable time of creation
- Capable of being bought/sold/transferred and legally enforced
- Income streams generated should be able to be isolated from those of other assets
- Able to be sold or transferred independently of other business assets
- Subject to expiration, destruction, or termination at an identifiable time
Why is intellectual property valuation becoming more important?
Different types of IP, such as patents and trademarks, can carry tremendous value in the modern service-based economy, and often account for the bulk of a company’s value, rather than physical assets such as real estate, manufacturing facilities, or inventory. Technology companies in particular may be heavily reliant on IP for the majority of their valuations. For manufacturers, what separates them from their competition is often their intangible assets, such as trade secrets.
There is also a risk of investment in IP creation overshadowing the value of the IP. Research and development is a critical (and costly) requirement for many companies. However, if new IP is not properly valued, a balance sheet may only reflect the investment in creating the IP, which may cause the company to be undervalued. This, in turn, can affect investor returns, mergers and acquisitions, as well as accounting and taxation.
There are three primary categories of valuation methods for assessing IP and IP rights: income-based, market-based, and cost-based. Choosing the right method for IP valuation will depend on the type of IP, development stage, valuation purpose, and available data.
The income method of IP valuation, also known as the economic benefit method, assesses the income or cash flow that the asset is expected to generate over its useful economic lifespan.
The market method looks at prices charged for a similar IP asset in unrelated party transactions. This method relies on finding reliable data for IP that is sufficiently similar to the IP being evaluated, including characteristics of the transactions related to the similar asset(s), such as sale costs or royalty rates.
Cost-based methods measure value by assessing IP creation and development costs, as well as the cost of maintaining the asset over its economic life.
A hybrid method is the relief from royalty approach, which combines the market and cost methods to calculate how much a company would save on royalty payments or licensing fees if it were to purchase a given asset outright, rather than licensing it from a third party.
Need expert guidance on intellectual property valuation?
Our experienced team of intellectual property lawyers and specialists can help guide you through the process of valuing all your business assets, including both physical assets and intangibles like intellectual property. Contact us to discuss your IP portfolio and how we can help you assign the right valuations today!
About the Author
John Woodson is a Registered Patent Attorney who practices in the area of patent prosecution, patent infringement studies, and client counseling.