The IP valuation of a company’s assets is a study based on law, economics, finance, accounting, and investment at a particular point in time, which requires expertise on technical matters, intellectual property, marketing, finance and strategy. IP valuation is a process which aims to collect important information in order to determine the actual monetary value of particular intellectual property assets as well as the future economic benefits that they will bring.
An accurate assessment of the value of intellectual property can be very useful in the business environment to facilitate management decisions related to effective development and marketing of products. Therefore, the following aspects can be considered by businesses as incentives to conduct an intellectual property valuation:
- valuing intellectual property facilitates investment in industry, making business more attractive and more viable to potential investors and shareholders;
- IP valuation facilitates the commercialisation and transactions of intellectual property rights; for example the assessment of the value of the intellectual property can be used before and in the process of negotiating the terms of a transfer, licence and franchising of intellectual property rights;
- IP valuation will also be useful when determining investment strategies, in particular establishing a new enterprise, merging of legal entities or setting up joint ventures;
- a thorough understanding of the value of the IP assets ensures more informed negotiation and allows the determination of fair royalty rates; and
- IP valuation can provide the management with the information needed to ensure optimal conditions for the exploitation of the IP asset, which fits within the business strategy of a company.
IP valuation can also help to choose a strategy to be used in case of intellectual property disputes when deciding whether to introduce a court action or to opt for alternative dispute resolution mechanisms such as mediation or arbitration.
Assessing the economic value of intellectual property is often used in research and development management and marketing analyses.
Several approaches and methodologies are commonly used to estimate the value of intellectual property assets. However, businesses often have some difficulty in selecting the method that is most appropriate for valuing a specific asset in a particular business situation, since they all have their limitations and no one method is exclusively suitable in all cases.
There are sets of rules and criteria which may be applied before deciding how the economic value of the IP will be calculated. It is very important to consider the following aspects:
- the type of IPRs (e.g. trade marks, industrial designs, patents);
- the purposes of the valuation;
- the relevant information available;
- the potential market for them (geographical coverage);
- the risks associated with the investment in intangible assets; and
the type of the business activities of the parties and the competitors involved in the transaction where the IP constitutes the relevant element (e.g. transfer or licensing of IP).
The approaches of IP valuation are generally grouped into two main categories with a few subcategories:
- The quantitative (monetary) valuation – the intellectual property value is expressed in monetary terms and includes the following methods:
- Cost-based method – this method is used to measure the costs in developing the intellectual property, which could be the actual cost incurred in creating the IP or the estimated cost of replacing the IP or creating an equivalent asset;
- Market-based method – the value of the IP is determined by comparison with identical or similar IP for which price information is available;
- Income-based method – is broadly used to value the amount of economic income that the IP asset is expected to generate adjusted to its present day value;
- The qualitative valuation (non-monetary) – the intellectual property value is obtained through “value indicators”, such as the type of the legal protection of the intellectual property, the level of the research and development in a technology, the market of the products and/or services commercialised, etc.
In order to have accurate and usable results, it is important to select the most appropriate method or combination of methods for each individual case. Indeed some of those methods are more suitable for the valuation of certain IP assets. The cost-based method is commonly used in the valuation of software and databases, the market-based approach for the valuation of IP assets such as trade marks, patents, and related research and development activities. In practice, in most cases an effective valuation applies a combination of the methods listed above. Performing proper IP valuation is a complex issue and therefore requires using the services of qualified valuation experts specialised across the wide variety of industries and assets and who have the ability to critically analyse the multitude of valuation contexts.