Intellectual property valuation
There are different methods for valuing IP and any IP valuation will vary depending on a broad range of factors, primarily the time, context or purpose and application of the valuation.
Good market research and professional advice from a range of specialist professions can help determine a realistic valuation; however, an absolute valuation will only be determined when a purchase, transfer or transaction price has been formally agreed.
Why value your intellectual property?
There are many reasons for placing a dollar value on IP. These include the need to:
- understand the assets held by the organisation and improve decision making, particularly in relation to determining future investment or development
- determine a ‘walk-away’ position in negotiations
- secure financial investment
- establish the amount of damages to seek for infringements
- meet legal and accounting standards requirements
- meet taxation liabilities, particularly capital gains tax and stamp duty.
For valuations relating to legal and accounting requirements and taxation liabilities, IP should be considered as a legally defined and standardised asset, recorded and valued according to relevant legal and accounting standards. For general bookkeeping and accounting purposes, IP is considered an intangible asset, which has special protection through patents, trade secrets, trademarks, designs and copyright. These methods of protection establish rights that are identifiable assets and can be recorded.
Valuations relating to investment decisions and quantifying damages for infringements are more complex and generally concerned with valuing the business opportunity relating to the development of the IP. The value of the same IP will vary over its lifetime, and any specific valuation of IP will depend factors that influence the ability of the business to commercialise the opportunity arising from the IP. That is, the IP will be worth more to those who can commercialise it.
Steps to valuing intellectual property
The value of the IP is usually considered to be equal to the amount that a purchaser would pay for that asset at a market price. There are 3 fundamental steps to valuing IP:
- Determine the source of the IP.
- Determine the key benefits associated with the IP.
- Select the most appropriate approach to suit your valuation requirement:
- market-based approach (e.g comparable transactions/industry benchmarked and future-income based)
- cost approach
- elimination approach. This is based on valuing the IP as equal to the value of the business, less the tangible net assets used in the business, and the goodwill not specifically attributable to the IP.