I know that it can be pretty tough valuing intellectual property or IP since there is no standard gauging scale. It is a non-tangible asset, which makes it quite difficult to value.
Through my years of valuing IP, I have discovered several standard ways to get the valuation done and have it accepted.
My goal in this article is to discuss how to value intellectual property – the methods you can use to do this. I would also shed light on the type of assets that are regarded as IP, and the prerequisites for valuing IP.
How to Value Intellectual Property
Intellectual property (IP) is a general term covering various intangible assets owned and controlled by individuals and companies. It includes creations of the mind, such as inventions, literary and artistic works, designs, symbols, names, and images used in commerce and protected by the law. IP assets consist of four main types:
- Patents: These are one of the most valuable and difficult-to-obtain types of IP. Patents protect novel and useful inventions, granting the inventor exclusive rights for a specified period.
- Trademarks: Trademarks safeguard brand elements like logos, names, and symbols that distinguish the products or services of a company.
- Copyrights: Copyrights protect original works of authorship, such as books, music, and art, giving creators the exclusive right to use and distribute these creations.
- Trade Secrets: These are confidential business designs, practices, processes, formulas, or any information that provides a competitive advantage and is kept secret within a company.
The valuation of IP in the US is guided by both federal and state laws. Federal laws provide protection for different types of IP, such as the Patent Act, Copyright Act, and Lanham Act for trademarks. These laws grant exclusive rights to IP owners and play a significant role in determining the value of these assets.
IP Valuation Prerequisites
The value of an IP asset lies in the exclusive legal rights the owner has to prevent other people from using it. Therefore, for its value to be measured, an IP asset must provide its owner with a quantifiable amount of financial benefits, and increase the value of other assets that it is associated with.
Before conducting an IP asset valuation, the following conditions should be met by the asset:
- It must be clearly identifiable and must have a recognizable description
- Its existence must be backed up by tangible evidence, such as a contract, license, registration document, or record in financial statements
- It needs to have been created at a specific and identifiable point in time
- It must be transferable and enforceable by law
- Its revenue source needs to be distinct and separately identifiable from that of other company assets
- It should have the ability to be sold independently of other business assets
- It should be vulnerable to destruction or termination at a specific point in time.
Methods of Valuing Intellectual Property
There are three main methods used to carry out IP valuation: the Income Method, the Market Method, and the Cost Method. Each of these methods provides a unique and comprehensive framework if you’re seeking to quantify the worth of your IP assets.
If you need professional advice on the most reliable method to conduct your IP valuation, or you need expert help carrying out the valuation itself, you can contact an IP lawyer.
The income method values IP assets based on the amount of income they are expected to generate in the future, as well as the economic benefits they will bring their owner within their lifetime. Being the most common method for valuing IP, the income-based method is best for assets:
- With positive cash flows
- With cash flows that can be reliably estimated for the future
- Where discount rates can be obtained by using a risk proxy
The income method often employs techniques such as discounted cash flow (DCF) analysis. This involves predicting the future cash flows the IP is likely to generate and then adjusting these figures to the present value, considering factors like the time value of money and risk.
With the market method, the value of IP is determined by reviewing comparable transactions involving similar IP assets. In essence, it involves deriving an estimate of the value of an IP asset by looking at how much similar IP assets sold for, under similar circumstances.
Since this method is based on market information, it is particularly useful when there is a strong market for similar IP assets and a sufficient number of comparable transactions for analysis. You can use market-based IP valuation for:
- Licensing deals
- Tax defenses
- Corporate disputes
- Business sales/purchases
The cost method focuses on the cost of creating or replacing IP. Simply put, it values an IP asset by answering the question: “How much would it cost to recreate this intellectual property from scratch today?” This method is great for IP assets that are easily replicated, or whose financial benefits are difficult to measure.
Multi-Attribute Utility Theory
This involves assigning subjective rights to various attributes of the IP and then combining them to derive a value. It is suitable for complex situations where multiple factors contribute to the value of the IP.
Why Is IP Valuation Important?
IP valuation is important because it helps IP asset owners make informed decisions about licensing, selling, donating IP rights, or carrying out any other commercial arrangements. IP valuation also helps you enforce your IP rights properly, secure financing, attract partners/inventors, and settle disputes.
Can Small Businesses Benefit From IP Valuation?
Yes, small businesses and startups can greatly benefit from IP valuation, as long as you have valuable intellectual property, such as unique product designs, processes, logos, and names. By valuing IP assets, your business can attract investors, secure financing, and make strategic decisions that will facilitate its growth.
How Often Should a Company Conduct IP Valuation?
The frequency of IP valuation depends on factors such as changes in the market, technological advancements, or significant developments within the company. Typically, companies may opt to conduct valuations periodically or when there are substantial changes in the IP portfolio.
Intellectual property is the key to the success of many companies, which is why it is important to know how much they are worth. There are three main methods of valuing IP assets, which have been discussed above. Your choice of which to go for should depend on your IP asset’s nature and the valuation’s intended purpose.