Valuation Report Spring 2014
Know the Value of Your Company’s Intellectual Property
Depending on the nature of the business, intangible assets can represent an enormous percentage of a company’s value. In fact, Ocean Tomo’s most recent Intangible Asset Market Value Study indicates that intangible assets account for over 80 percent of the market value of the assets held by companies in the S&P 500.
Intellectual property (IP) — a subset of intangible assets that includes patents, trademarks, copyrights, designs and trade secrets — is often what differentiates a company and gives it a competitive edge. However, accounting rules preclude recording most of these assets on the balance sheet, so managers and investors are often lacking data that would help them understand the value of their company’s IP.
Driving Economic Benefit
Like any asset, the value of IP depends on its ability to generate an economic benefit to its owner. For example, a trademark might allow a company to charge a premium price. A proprietary process might allow a manufacturer to be the low-cost leader. In both of these examples, IP provides its owner with incremental profits or lower risk.
Most IP valuation occurs in the context of transactions, litigation and compliance reporting. However, owners and executives may get the most benefit by incorporating IP valuation into their broader decision-making process.
Some of the factors that influence IP value include:
- Extent of advantage: IP is more valuable to the extent it increases demand for a product or reduces the cost of production.
- Extent of protection: IP is more valuable to the extent it provides a stronger exclusive right.
- Stage of development: IP that is fully developed and is enjoying or contributing to commercial success is more valuable than IP that’s in its infancy or is no longer protected.
- Market size: IP is more valuable to the extent it addresses a larger or faster growing market than if it addresses a smaller or slower growing market.
- Manner of use: IP may be more valuable to the extent its owner can exploit it directly rather than license it to others. However, direct exploitation may entail greater risks than licensing.
Factors that affect license value include whether the license is exclusive or non-exclusive, transferable or non-transferable, long-term or short-term, and broader or narrower with regard to geographic and field of use restrictions.
- Enforcement cost: The decision to pursue and maintain IP rights can be significantly affected by enforcement costs.
All of these factors and others, such as the cost of developing IP, are considered when assessing the IP’s value. The most common way to value IP is to determine its ability to generate future cash flows and then discount those cash flows to present value based on their risk.
Assessing the value of IP relative to “comparable” assets is frequently difficult. But as an additional data point, valuation professionals sometimes turn to online IP marketplaces, including Intellectual Property Exchange International (IPXI), Tynax and yet2. These marketplaces list IP for everything from medical treatment methods to software applications and consumer goods.
Similarly, services such as ktMINE, RoyaltySource and RoyaltyStat are a source for royalty rates for all types of IP. The United States Patent and Trademark office is another source of relevant information.
Owners and managers can improve profits and lower risk, and investors can improve returns, by gaining an understanding of the value of a company’s IP and the drivers of that value. An IP valuation professional can guide owners and investors through this process efficiently.
We are experienced in intellectual property valuations. Contact us today to discuss your needs.