Like other forms of property, you can buy, sell and license IP, it is important you understand the value your trade mark, patent or design.
Your IP could be as valuable as your plant, premises or stock. It could even be your single most valuable asset which you could use to secure finance for company growth. You may also need to know the value of your IP assets when:
- seeking funding
- for joint ventures
- mergers and acquisitions
- or during bankruptcy
Not all IP is valuable. Unless your IP assets help to create, maintain or increase cash flow they may have no financial value.
Methods for valuing IP
Valuing IP is not an easy task. How much is your brand name worth after years of marketing? Does your patent protect your product or is it redundant?
Intellectual property rights change in value for a variety of reasons. A patent may begin its life as a unique solution to a problem, but in time other solutions to the problem may be found which reduce its worth. Alternatively, successfully marketing your product can ensure your patent is very valuable. Trade marks generally gain value as they become better known.
There are a number of ways to value IP rights (IPR). They all have their limitations and no method is appropriate in every case. The stage of development of the IPR, the availability of information and the aim of the valuation all have a bearing on the method used.
Here are 3 useful examples:
The cost method
This valuation is based on the costs you incurred developing or creating an IPR. It also values what it might cost to recreate or develop a similar product or service. It doesn’t take into consideration the current market value of your product.
Costs usually included are:
- materials and equipment
- research and development
- creating a prototype
- testing and trials
- regulatory approval and certification
- registering the IP
- overheads for utilities, accommodation and support staff
This method assumes that your potential buyer can avoid these costs by buying the IPR .
Valuable benefits may be:
time: by purchasing the right from the you, the buyer will not waste time researching and developing their form of IP
expenditure: if attempting to recreate their own IP, the buyer would spend at least this much
success: a buyer may not be successful in developing the IP
protection: a buyer may not be able to protect their IP, and may well be infringing on others
This method of valuing intellectual property assets lends itself to an overall assessment when buying a business. It also considers assets when they are at an early stage in their development. However, the emphasis on costs, rather than profit, can skew the figures so that market potential is not fully recognised. This method does not take account of future value. It therefore misses out on a standard by which value is traditionally calculated.
The market value method
Understanding the value of your product based on its recent track record in the market place. This may be a more reliable way of establishing what people might pay for your IPR. Assessing the sale or licensing of similar products in the market may provide a useful benchmark.
The problem with this method is that it can be very hard to find published data on IP transactions as they are often confidential. IP transactions are hard to generalise. There are sources of data for various sectors, but they tend to provide a wide range of figures for sales and licences which are only broadly comparable.
Few transactions allow a valid comparison and arrangements may differ in terms of:
- payment structure
- any technical/other support provided
- territory, economic climate and market conditions.
No two deals are the same.
This method is unlikely to be used to value patents. That is because the value of a patent depends on its novelty. That novelty means there is unlikely to be comparable information. However, this method is objective and it can provide a realistic analysis of value based on your right’s worth as perceived by both owners and their consumers. This method can be useful for researching the high, low and average royalty rates paid in any given market sector. In negotiating a licence agreement for example, an agreed industry range may form the basis of a discussion.
The income or economic benefit method
This method focuses on the revenue IP rights may generate for your business in the future. It considers both the future income, which a right may generate during its economic life, and the costs of generating that income. Risk and financial costs are factored into the equation. The end result is described as the ‘Net Present Value’ or NPV.
This method allows a buyer to consider investment based on whether the NPV is positive or negative.
Although the NPV is a useful, easy-to-use tool. It should be remembered that the income or economic benefit method of valuation is based on an assessment of likely future events rather than past performance.
Difficulties with this method include:
it is difficult to estimate the economic life of the IPR
it is difficult to estimate the income over several years
Other factors that need to be taken into account include:
- the strength of the IPR
- the size of the potential market
- the nature of the competition
- changes in the economic climate
- the cost of registering, enforcing and defending the IPR need to be taken into account.
The way in which the IPR is exploited, the costs involved, the time it will take to get to market and the risks involved along the way will vary from business to business. Other things to consider are income which may be generated from other factors e.g. the skill of the business’ staff.
Uncertainties about the future mean that it is unrealistic to project income for more than 4 or 5 years. Trying to estimate the income for early stage technology is very difficult.
A sub method of the income or economic benefit method is the relief from royalties method. This method assesses IP royalties. It is based on an assessment of what royalty costs a company is avoiding by virtue of owning the IP right.
We provide these supporting checklists which set out the major issues you need to think about when valuing IP: