Usually, companies owe two types of assets – tangible (equipment, buildings, machinery, money) and intangible (patents, trademarks, copyrights). While tangible assets are quite clearly visible and perceptible, intangible assets encompass a spectrum of innovations, original expressions, and distinctive identifiers that contribute to a company’s competitive edge and market presence. Let‘s explore, how to evaluate these assets, in more detail.

Intellectual Property (IP) is an intangible asset – a unique creation, a result of a company’s work or reputation.  It is important, that intangible assets are protected by law from unauthorized use. They can be independently identified, are transferrable, and have an economic lifespan. IP may be of two types:

• Artistic intellectual property refers to creations of the mind that are primarily artistic or creative: literature works, music, visual arts, performing arts, film, and multimedia.
• Commercial intellectual property refers to intellectual property assets that have commercial value and are utilized within business contexts to generate revenue, enhance competitiveness, and protect market position: trademarks, patents, copyrights, and trade secrets.

Today we will analyze commercial IP and its valuation possibilities and methods, as for many enterprises IP have become more valuable than their tangible assets, and are key to their success.

Here’s a brief overview of the main types of intellectual property:

• Patents protect inventions and discoveries, granting the inventor exclusive rights to use, make, and sell the invention for a limited period, usually 20 years from the filing date of the patent application.
• Trade secrets protect confidential information that provides a business with a competitive advantage. Unlike patents, copyrights, and trademarks, trade secrets are not publicly disclosed and have no set duration of protection. Trade secret protection lasts as long as the information remains confidential and provides a competitive advantage.
• Copyrights protect original works of authorship fixed in a tangible medium of expression, such as literary, artistic, musical, or dramatic works. Copyright protection gives the creator exclusive rights to reproduce, distribute, perform, display, or license their work for a specific period, typically the creator’s lifetime plus 70 years.
• Franchises are the type of business model in which a company licenses its name, trademark, proprietary knowledge, and processes to another party, called the franchisee, in exchange for a fee.
• Trademarks protect symbols, names, slogans, and logos that identify and distinguish goods or services of one party from those of others. Trademark rights prevent others from using similar marks in a way that could confuse consumers. Trademark protection can last indefinitely as long as the mark is used and maintained properly.
• Brands are intangible qualities of products or services that give it a unique and recognizable identity that sets it apart from others in its industry.
• Trade names are names of companies used for business purposes that are different from their official, registered legal name. Also known as a trading name, business name, or DBA -“doing business as”.

In today‘s fast-changing business environment, IP creates a competitive and significant advantage for company owners. That’s why it is extremely important to evaluate these assets and know their monetary value. In essence, the valuation of intellectual property serves as a cornerstone in evaluating the financial health, potential growth, and market competitiveness of the organization as a whole. Therefore, an accurate assessment of intellectual property valuation is paramount for strategic decision-making, investment opportunities, mergers and acquisitions, and overall business performance analysis.

For IP valuation, the asset should meet the following conditions:

• Possibility to identify the asset separately (subject to specific identification and with a recognizable description)
• Tangible evidence of the existence of the asset (e. g. a contract, a license, a registration document, etc.)
• Possibility to identify the point of time when the asset was created.
• Possibility of legal enforcement and transfer.
• Separation of its income stream and the possibility of isolating it from other business assets.
• Possibility to sell it independently of other business assets.
• Possibility to destroy or terminate it at an identifiable point in time.

There are three methods of IP valuation:

• Cost-based method. This method determines the value of an IP asset by assessing the cost required to reproduce a similar or identical asset. It proves beneficial when the IP can be replicated easily and when the economic benefits derived from the asset are challenging to quantify accurately. However, this method overlooks any wasted costs incurred during the asset’s creation or acquisition process and fails to acknowledge any distinctive or innovative features inherent to the asset. Essentially, the cost method offers a straightforward approach to valuing IP but may not fully capture its unique value propositions or potential market advantages. You may use a cost-based method for patents, portfolio valuations, mergers and acquisitions, seeking investment, and IP licensing).
• Market-based method. This method relies on comparing the actual prices paid for the transfer of rights to similar IP assets under similar conditions. This approach offers simplicity and draws upon readily available market data, making it a popular choice for estimating approximate values. It is commonly employed to establish royalty rates, determine tax obligations, and provide input for more complex valuation methods such as the income approach. By leveraging real-world market transactions, the market method provides valuable insights into the relative value of IP assets, facilitating informed decision-making and negotiations. You may use this method for licensing deals, corporate disputes, tax defenses, or business sales/purchases.
• Income-based method. This method determines the value of an IP asset by assessing the economic income it is anticipated to generate over its lifespan, adjusted to its present-day value. It is particularly well-suited for IP assets that generate positive cash flows and for which future cash flows can be reasonably estimated. Additionally, it requires a proxy for risk to calculate discount rates effectively. You may use this method for licensing an IP asset or selling/buying business.

No matter the approach employed, valuing intellectual property entails collecting extensive information about the IP asset and developing a deep understanding of the broader economic environment, industry trends, and unique business factors that influence its value. In simpler terms, assessing the worth of IP demands thorough research on the asset itself and a keen awareness of how external factors impact its value within the context of the market and the company’s operations.

The valuation of IP is a multifaceted process crucial for businesses, investors, and stakeholders aiming to understand the true worth of their intangible assets. Regardless of the method employed—whether it’s the cost-based, market-based, or income-based approach—the valuation process necessitates a comprehensive understanding of the IP asset itself, coupled with a nuanced grasp of the economic, industry, and business-specific factors that shape its value.

Accurate IP valuation facilitates informed decision-making regarding investment, strategic partnerships, licensing agreements, and overall IP management strategies. By recognizing and quantifying the value of their intangible assets, businesses can optimize their asset portfolios, leverage their competitive advantages, and maximize their potential for long-term success in today’s knowledge-driven economy.

Use our Royalty Rates database to find needed comparables data for your IP valuation. It is a valuable resource for anyone involved in intellectual property valuation. Our One Search service provides on-demand access to this database without the need for a subscription. Simply enter your search criteria, and we’ll provide you with a detailed report of relevant licensing agreements, empowering you to make precise valuations.

Contact us for a live demo or trial access, or dive in directly by filling out the One Search form.

Sources:

https://www.wipo.int/sme/en/ip-valuation.html

https://www.marsh.com/pr/en/services/property-risk-management/insights/importance-of-intellectual-property.html

https://www.bdc.ca/en/articles-tools/change-ownership/sell-business/how-to-value-intangible-business-assets

https://www.valentiam.com/newsandinsights/ip-valuation

https://www.accountingtools.com/articles/intellectual-property-valuation.html

https://www.rcgt.com/en/insights/what-is-business-intellectual-property-worth/