Entrepreneurs who pay attention to Intellectual Property value (IP) see business differently than their competition. Where your competitors might believe the real value of their business is the revenue, by the end of this article, you’ll know better.
Since you’re here now, let’s first set the intellectual property foundation before getting into valuation. By the end, I am confident you’ll agree that if you approach your business in this way, you’d be playing a different game – a game where the opportunity exists to out maneuver your future competitors and multiply what your business is worth when you exit.
Let’s get started, shall we?
Intellectual property covers a patented product, a patentable product, process, service, trademark, copyright, or brand name. Essentially, it is an asset created from a company’s work or reputation. These assets are protected by the law from unauthorized use because they are unique to the company and drive the value within that company.
Intellectual property valuation is the process of evaluating the market value of the assets.
And that’s not all.
Your intellectual property represents the best your business has to offer. Therefore calculating your business’s intellectual property functions as a calculation of your business itself.
Quantitative vs. Qualitative Valuations
As a business, you want your IP assets to give you an edge over your competitors.
There are two valuation methods put in place to determine how much of an edge your IP assets have in the industry:
To estimate the value of your IP assets, quantitative valuation relies on measurable numbers and data. This type of valuation assigns a monetary value that your IP asset made to your business – whether or not that value was direct, or caused indirectly by increasing other aspects of the business that interest investors.
On the other hand…
Qualitative valuation does not answer the valuation question in terms of monetary value. It’s used for internal patent management in many cases.
Now, here’s something interesting –
It is possible to use both valuation methods when assigning valuations to IP assets. Both methods deal with assigning value, however, they look at the process from two different perspectives. The two methods lend themselves to different types of situations. It’s up to you to determine which suits your situation best.
There are four categories that quantitative methods fall into: cost-based, market-based, income-based, and options-based.
The cost method for valuation of IP takes into account the costs your business accrued from creating and developing your Intellectual Property Rights (IPR), along with the potential cost of creating an IP asset is similar to the one that exists. Examples of such costs:
- Research and development
- Labor cost
- Creating prototypes
- Running trials of the product
- Getting approved and certified
- Registering the IP
- Utilities, accommodation, support staff, etc.
If a business purchaser bought the IPR, the idea behind the cost method valuation is that they wouldn’t incur these costs. Then, they wouldn’t experience the consequences of failing to develop their own IPR or deal with the complexities of protecting their own IPR. Note that future profits aren’t calculated into the cost method, it revolves only around costs incurred.
A product will be valued depending on how it performs in the market, according to the market value method. The market value method also looks at transactions of similar products and is based on supply and demand in the marketplace.
The problem is… There isn’t much information available on other products available in the marketplace, because the data is confidential. There’s a good chance the information you’re able to find will be generic.
The good news is – If correct information is discoverable, this method is seen as reliable and fair because it accounts for consumer behavior.
The income-based method is also known as the ‘economic benefit method,’ and it takes into account the economic benefit of IP assets and the future income it could generate. Also included is the cost to generate that income.
Risk and financial cost are taken into consideration and added to the calculation, and the result is called the Net Present Value or NPV. This number can be used to help prospective buyers make a decision on their purchases.
Unlike the cost method which uses past information for valuation, this method uses potential future information. This can cause issues, however. Let’s face it, I’d be willing to bet neither of us are too good at predicting the future… Even if we think we are.
Here are some factors to consider when using the income-based method of valuing IP:
- The state of the economy
- The extent of the IPR’s market
- Type of competition
- Cost of registering and defending intellectual property
There is another form of this method that deals with relief from royalties. In this form, intellectual property assets will be valued depending on how much royalty money the company would pay if they didn’t own the asset.
The options-based method uses the financial options-pricing methodology for valuing IP assets. Much like the income-based method, it also considers future income, and it also takes into account the uncertainty that surrounds an exploitable IP asset.
Due to uncertainty, this method creates a number of outcomes in order to arrive at the present value. This method could be useful for technology that’s still in its early stages and is likely to develop in the future.
In general, quantitative methods are used more often than qualitative methods. There are instances where qualitative methods come into play. These methods include the rating/scoring method and the value indicators based method.
This is a multi-faceted valuation method that assigns a score to an IP asset depending on non-quantifiable factors. It uses a number of rubrics to define strategy, technological advancement, and brand strength, along with determining the risk and opportunities that coincide with the asset.
Value Indicators Based
This method collects information related to the IP and analyzes it according to statistical methodology. It allows for internal comparisons to be made from various indicators.
When to Use Intellectual Property Valuation
There are many benefits to valuing your intellectual property. Doing so can help your business determine the correct royalty rates to charge for the use of your IP. It could also increase the value of your business and introduce it to more fruitful opportunities.
New businesses value their intellectual property to encourage outside investment, as intellectual property is a good way to communicate your business’s value to investors.
Here are a few situations in which you may need intellectual property valuation:
Purchase/Sale of IP Assets, Both Standalone and Through M&A – Licensing
When purchasing individual assets and entire businesses alike, IP valuation becomes effective. They are integral to determining the purchase price of businesses, and acquiring IP assets may be the reason for purchasing the business itself.
Valuation also may be necessary for the purpose of financial reporting.
Asset-Backed Financing or Securitization
To get debt financing, it might be necessary to put up IP assets as collateral. Or if there is a steady stream of income tied to the asset, that stream may be analyzed and sold in exchange for financing.
Intellectual Property Litigation
The valuation of an IP asset may help decide whether to engage in property litigation. It could also function at various stages of the dispute process. If the court ends up finding infringement, the valuation of the asset could be used to calculate the amount of a damages award.
Bankruptcy and Liquidation
Both situations require the selling of assets, which requires valuation. This valuation could also be used to hold a solvency or insolvency analysis.
Valuing IP assets may need to be done for compliance reasons such as accounting or tax planning.
Internal Decision-Making and Portfolio Management Tips for Intellectual Property Asset Management and Valuation
Think Clearly and Be Rational
It’s important to keep a good head on your shoulders and remember this… If it seems too good to be true, it probably is.
The valuation method may not be reliable if both the buyer and the seller view the results as too favorable for one party or the other.
Consider the Outcomes
The methods are most likely sound if the buyer and the seller both view the outcome of the transaction as fair and reasonable.
In all likelihood, tax authorities will dispute your IP valuation. With this in mind, it’s always helpful to approach the situation on the defense. Choose the method that you can defend the most thoroughly if a dispute should happen, not the one that has the best monetary outcome for your business.
Talk to the Professionals
It’s rare that a company will have an IP expert on staff. Keep in mind, it’s necessary to have expert help to steer clear of disputes. If you work with a professional, you are less likely to get audited or adjusted, or experience penalties.
Connect With an Intellectual Property Valuation Firm
IP valuation is a complex and multi-layered process, and following through with it can bring great benefits to your business as a whole. If you break down the process into digestible steps, valuation is manageable. And if that isn’t possible for your business, consult an outside professional to get an accurate estimation of the value of your intellectual property.
Do you think most of your competitors are thinking about Intellectual Property value (IP) in this way?
I’ll tell you what – because you’re here now, and you’ve come this far, click here for a video example of how you can skyrocket your business value using a Patent Portfolio >> I hope you enjoy it as much as I did making it for you.
Alternatively, if you’re ready to increase the value of your business with IP protection right now… I’d like to invite you to a complimentary patent protection strategy call >>
A patent protection strategy call is where a member of my team connects with you by phone at the time of your choosing. We patiently listen to you, help you understand all your options, and then follow the best path to protect your idea and increase the value of your business.
There is no charge, and it’s your first step to securing patent protection on your invention. Click here to schedule now >>
Let’s increase your business value together.
In Case You Missed It…
If you want to profit from your patent and your invention, you need a strategy. Understanding “exchange of value” in business is critical. You need to create value from your invention so other people are begging to pay you for it.