When it comes to managing assets in the ever-evolving business space of today, valuation of intellectual property is an aspect that keeps growing with so much importance. Its importance cannot be overemphasized, especially for businesses that want to keep growing and stay profitable. In this post, we’ll take a look at the methods employed in determining the value of intangible assets.
Who needs IP valuation?
- Here are a few stakeholders that need to ensure that their IP valuation is up-to-date and accurate:
- Public companies’ auditors
- Banks because their collateral, in many instances, is dependent on their borrowers’ IP values
- Taxing agencies that generate their revenues by transferring IP assets
- Fact finders of all categories
- Investment bankers, as well as merger financiers who acquire or own IPs
When is IP valuation needed?
Intangible asset valuation is necessary for some situations including the following:
- In a business or personal divorce
- In the event of bankruptcy
- In litigation
- During IP licensing
- In a merger, sale, joint venture or other related transactions
- For estate planning
What are the methods of Intellectual property valuation?
Valuation experts and professionals have agreed that there are three widely accepted and standard IP valuation methods and these are known as the income, the cost, and the market based-based methods. Here’s how each of them works.
The cost approach:
This method, whether based on future cost or historical cost, typically focuses on substitution. What this means is that the value of an intangible asset does not exceed the cost to reproduce or obtain the asset. You can measure the cost by purchasing the asset right away, by using an asset of equal quantity to replace the asset or by completely reproducing the asset.
Intellectual property cost measurement includes direct costs, such as for designs, engineering and personnel, materials, legal; indirect costs such as the duration of development; costs of overhead and the profit percentage for the asset developer.
The market approach:
This is most applicable when there’s the existence of a true marketplace, and actual comparable transactions are traceable. But before this decade at least, most intellectual assets weren’t being sold, bought, or licensed enough to establish a value which is based solely on market-dependent variables. It is therefore important for a qualified IP valuation expert to study and make adjustments to all current comparables so as to arrive at an accurate value.
Also, when choosing an appropriate comparable transaction, it’s important to consider the context in which it occurred: was the transaction a divorce or bankruptcy filing, litigation or an estate settlement? Any of these may make a comparable transaction not to be suitable for analysis – unless a compensating adjustment is made to the transaction. But when there is an availability of reliable data, the market approach is accepted to be the most systematic and direct method of valuing intellectual assets.
The market approach is driven by IntangibleSpring’s data, and you can count on us to provide the best data for this approach without any hassle.
The income approach:
This IP valuation method appears to be the most common. The method works based on the assumption that the value of any piece of intellectual property today is as result of the financial rewards than can be generated and estimated into the future for whatever may be contained in the remaining life of the Intellectual property.
The method requires that the valuation analyst is equipped with comprehensive knowledge and judgment to determine a crucial issue: how to determine the income ascribable from the asset. Will income be measured by some theory-based royalty or rent to be collected? Will the income be measured as the premium price fueled by the products making use of the IP? Or will it be measured as just a part of the operating income of the overall operations of a company or for a particular brand or technology?
Regardless of the valuation method used, intellectual property can have different values, with all of the values being correct at the same time. The reason for this is that unlike real estate, the values of IPs can be different depending on the owner and the purpose for which it is intended.
So which valuation method should you use?
The IP valuation method to be used at any point in time will depend largely on some factors such as the uniqueness of the asset, the amount of data that is available and verifiable, the context and purpose of the valuation, as well as the judgment of the analyst.
IntangibleSpring offers IP database that is searchable and comprehensive, contact us today to find out more!