The Value of IP Assets (Part II) With Rich Goldstein

Intro (00:09):
Welcome to Innovations and Breakthroughs with your host Rich Goldstein, talking about the evolutionary, the revolutionary, the inspiration and the perspiration, and those aha moments that change everything. And now here’s your host, Rich Goldstein.

Rich (00:33):
Rich Goldstein here, host of the Innovations and Breakthroughs podcast, where I feature top leaders in the path they took to create change. Pascal pa guests include Joe Polish, Roland Frazier, and Kevin King. This episode is brought to you by my company, Goldstein Patent Law, where we help you to protect your ideas and products. We’ve advised and obtained patents for thousands of companies over the past 28 years. So if you’re a company that has software or product or design you want protected, go to goldstein patent law.com where there are amazing free resources for learning about the patent process. And you could email my team@welcomegoldsteinpc.com to explore if its match to work together. You could also check out the book I wrote for the American Bar Association that explains, in plain English how patents work. It’s called the ABA Consumer Guide to Obtaining a Patent. So today I’m going to continue the discussion from last week about creating IP assets.

Rich (01:25):
And, um, there it’s really an important mindset shift, um, that’s at play here in this. So in general, business owners like to view their investment in IP as, um, kind the, the value of slowing competition or gaining sales. In other words, if they own the ip, how are they going to use that IP to stop competitors from hurting their sales revenue? Um, and, um, you know, they look at it in terms of the way in which they can slow competition or gain sales because they have the ip, because they have the patents, um, because they have the trademarks. Um, and in other words, they’re looking at it in terms of cash flow, um, and, and any return on investment. So if they’re going to invest in ip, they’re thinking of that return on investment that they might get in terms of, Well, am I gonna make more money?

Rich (02:22):
Am I gonna have more revenue, um, because I prevent a competitor from stepping on my toes? Or am I going to successfully avoid lost revenue because I prevent a competitor from, from stepping on my toes? But the thinking in terms of the business operation, the monthly cash flow, how is the IP going to help their, um, you know, bottom line, Uh, but growth oriented entrepreneurs view their investment in IP differently. They’re looking in terms of the increased valuation of the business due to the IP they create. They’re looking at it as an asset where if they create the asset, how much more is it going to make their company worth? And, um, you know, this value or, or that type of valuation can lead to a huge ROI when they actually exit the company. And granted, not every entrepreneur exits their company, but if you do, then um, having IP will increase the, the valuation of the company and it will be an ROI in whatever you invested in ip.

Rich (03:35):
Um, and so this is an important thing because the way to look at IP is in conjunction with, um, a profitable business, right? Um, so IP is most valuable when the business has value itself based upon its earnings, right? So, you know, people sometimes think about the value of a patent, but they think of about it in terms of the patent by itself. Like, Well, if I have this patent, are people, is someone gonna want to come along and buy this from me for X dollars? Uh, and if it’s just a patent without a business, then it’s highly speculative, right? People looking at it might say, Well, that’s a really cool idea. We might be able to create a profitable business around that and then be able to keep competitors way, but it’s still quite speculative. Um, and it’s not speculative though, when you do have a business built around that, when you’ve taken that idea, you’ve turned it into a profit, um, you’ve turned it into a product that has earnings, that has profit.

Rich (04:41):
Um, so when the business has a value itself based upon the earnings, then the IP is going to multiply that value. So that’s when IP is most valuable, is when it is part of a business that has its own value based upon earnings. Um, so now let’s think in, in general about the company valuation at exit or any company valuation at Exit. So when someone is looking to buy your company, uh, generally the way that it’s valued is based upon ebitda, um, which is another way of saying the yearly profit. Uh, and then you take that EBITDA or that yearly profit and you multiply it by some multiple. So, um, in any, um, exit situation, there is some type of multiple at play that is being placed against the profit. So, um, so valuation times a multiple and whatever that multiple is, it’s gonna be based on an assessment by the acquirer, by the person potentially acquiring your business on the apparent longevity of the business and it’s potential, right?

Rich (05:49):
So it’s like, well, if we’re gonna pay you three times what you, what your profit is in a year, that means we’re betting on the fact that we could continue on with the party, that the party’s gonna keep going with this company for at least three more years. And, and, and that would justify them paying you three times your profit, right? So it’s apparent longevity and also the potential for growth. So like the view of the business and like, well, what else could they do with it if it might be making a million dollars a year now? But if they think that it’s something that once they acquire it, they could grow to make 2 million or 5 million a year, then that justifies a higher multiple. Um, and so the multiple is helped by things that demonstrate sustainability of the business. Um, and also it’s helped by things that show the, the possibility of growing beyond, um, what you’ve already achieved.

Rich (06:47):
Now, the multiples also hurt by things that show risks to continue profitability. So it’s like things that provide additional confidence, uh, will increase the multiple things that, um, that tend to decrease confidence will reduce the multiple. Um, and in general it’s subjective and it’s negotiable. And in general, it reflects the buyer’s appetite for buying the business. They like what they see, then they’ll pay a higher multiple on the business, They’ll pay up high multiple on what your current profit is. But now I’m gonna give you an example of how IP plays a role in this. Uh, and we’re gonna look at three examples of, uh, when you’re exiting a business and when you have good ip, bad IP, and no IP at all. So three different scenarios. So first of all, good IP is the type of IP that actually prevents competitors from entering the space.

Rich (07:48):
So it’s patents that prevent them from making similar products. It’s trademarks for branding that the consumers are looking for. Consumers are looking for that particular brand name. Um, and because of your protection on that, because of your trademarks, competitors can’t use a confusingly similar name, and therefore it prevents competitors from really entering your business and competing with you. So that’s what we call good ip, bad IP as well. You do have patents, you do have trademarks, but maybe they’re two, Uh, maybe the patents are too specific, for example, where it’s, um, it’s a patent, but it’s on some specific details that your competitors don’t care if they copy or not. They could do it nine other ways that wouldn’t infringe the patent. So we’ll call that bad IP or poor ip. Um, but that’s going to be example too. And then the third example is without IP at all.

Rich (08:44):
Um, and so that’s where you, you are just going to base evaluation of the business on, on what you’ve achieved in terms of profitability because there is no, no IP to increase the value. So those are the three examples we’re gonna talk about. Um, and we’re gonna, um, base this example on you hypothetically selling a company that has $2 million in EBIT or $2 million in profit per year. And, and we’re gonna do this with a, a hypothetical IP investment. So hypothetically, you would be looking at spending $60,000 on your ip, and we’re gonna see how that plays out. Okay? So first of all, without ip, so if you don’t have ip, then clearly, um, it’s going to be based on the, the EBITDA alone, It’s gonna be based on the 2 million in profitability you have. And so hypothetically you have buyers that are willing to pay you a three time multiple on that 2 million in ebida.

Rich (09:43):
So three times 2 million gives you a 6 million valuation. That’s based on the EBIDA alone, right? There’s no IP to base it on. Now imagine if we had good ip. So imagine that we have the type of IP that prevents competition. Um, now the multiple gets stretched. Instead of of being willing to pay you three times your profit, your yearly profit, it stretched to six times a yearly profit because you have good IP that shows that there’s more longevity, there’s less risk, and there’s more opportunities for growth because it effectively prevents competition. So now you’ve got a a 12 million valuation. So it’s 2 million profit times six, six times multiple is 12 million. So now it’s a 12 million valuation that’s based on the ebitda since you have that good ip. So in this case, the IP added 6 million in valuation. So you got $6 million more for your business because of a $60,000 investment in ip.

Rich (10:44):
So looking at that and the ROI in that, that’s a hundred time ROI on your investment into ip. So it could be a very good roi. Um, when you invest in your IP and you get good ip, ip, that actually prevents competition. Well, uh, I’ve seen a thousand time ROI on ip, uh, with good ip. So, um, that’s the second example. So with good ip, you’ve gotten a hundred time roi. Now what about with poor ip? So what if the, the patents were very specific, you know, trademarks were kind of poorly done, but you still have it. You still have an IP portfolio and still to the buyer looking at, at your business and potentially buying your business from you, they say, Oh, they’ve got an IP portfolio. So what value does that have? Well, what it does is it stretches the multiple a bit.

Rich (11:37):
So let’s conservatively, conservatively say that that three time multiple gets only stretched to 3.3 times. So just a little bit more. So the willing to look at it as a 10 to 10% increase in, um, in the multiple. So with that 3.3 multiple, now you’ve got a valuation of 6.6 million, again, based on that same 2 million in profit. And also the fact that you’ve got the poor ip. So now the IP has added 600,000 to your valuation. So that’s cool. You got an extra 600,000 for your business instead of 6 million, you got 6.6 million. But remember that that $600,000 increased valuation is only from a $60,000 investment in ip. So you still got a 10 time ROI on the money you put into our, into ip. And the lesson here is that even when you have lousy ip, it’s almost impossible to not get an ROI on that IP investment when you exit.

Rich (12:45):
And granted, not everybody exits their business, but if you do, you will almost certainly get an ROI on the money that you spent on ip. And there’s a little bit more to this too. So again, we looked at at, at good IP and poor ip. So there was a difference in the money you get between good IP and poor ip, where you got 6 million with no ip, right? 6.6 million with poor IP and 12 million with good ip. So between the 6.6 million and the 12 million, that’s a 5.4 million gain that you had by the fact that your IP was good. And how do you get good ip? You get good IP from having good IP strategy from the beginning. So the lesson is that the way you achieve that additional gain, that additional $5.4 million gain is by having good IP strategy from the beginning. And, um, in some like that is, um, kind of what, um, kind of what I’ve learned, what I’ve actually been able to quantify through some solid quantifiable examples and, and seeing, um, a lot of acquisitions take place recently, um, especially in the Amazon space.

Rich (14:04):
And, and so this is the way in which IP can affect the value of your business. And the important thing here too is that mindset shift is like don’t look about like, well, is it going to have value in shutting down competitors? Are you gonna get you money back from being able to sh shut down those competitors while you’re operating the business? Look toward the end, look toward the exit, look toward the acquisition. Um, that’s when you’ll get the real roi. So next week we’re going to return to, um, to having guests on the show. Actually, my guest next week is gonna be Steve Sims. And Steve has, um, a really incredible story to tell and also has a really cool book that he is launching that I think in itself presents a helpful mindset shift to us all. So, um, that’s it for this week, and I’ll see you next time.

Rich (15:05):
Thanks

Outro (15:06):
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