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IP Valuation

IP Valuation: How to quantify intangible assets

In recent decades, the value of intellectual property (IP) assets has soared. Sometimes, an organisation’s intellectual property is worth much more than its combined physical assets, real estate, or other holdings, IP Valuation.

Assessing your intangible assets is essential to make the most of this “hidden” gold trove, particularly in these unpredictable economic times. But this process is more complicated than just cracking a box and counting the coins.

The current worth of IP

A 2020 analysis claims that during the mid-1990s, the total value of intangible assets owned by S&P 500 businesses increased significantly — from USD 3.12 trillion in 1995. When physical assets predominated the account books in 1975, the combined IP value of all S&P 500 companies was just USD 122 billion.

Since then, the rapid pace of technological advancement, the growing significance of brand identity in globalised trade, and the tightening of international accounting regulations have all worked together to guarantee a turnaround in fortunes for substantial holdings, one that has convincingly pushed intangible assets to the fore.

IP’s relative weight has also significantly increased over the same period as its net worth. The market value of the S&P 500 businesses’ IP rose from 68% in 1995 to 90% in 2020. These numbers suggest that IP will continue to provide most publicly traded companies with excellent proportionate and absolute value in the coming years, notwithstanding the COVID-19 pandemic’s negative impact on economic growth.

What is the value of the various types of IP?

Of course, specific examples differ significantly from asset to asset. But compared to the other three primary forms of IP—trademarks, copyrights, and trade secrets—patents are typically more valuable.

They result from the work required to get such rights and the inherent worth of what patents protect, namely the authorship and exclusive ownership of an innovative product or solution. The time it takes from application to approval for a trademark is frequently much longer than it takes for a patent from a national or regional IP office. For instance, the United States Patent and Brand Office typically requires 12 to 18 months to register a trademark (USPTO).

In contrast, a patent at the same office usually takes 24.4 months from the time of initial filing to the time of final disposition. Additionally, it should emphasise that even unregistered trademarks can offer some level of legal protection, whereas unfiled patents provide a different level of security. Similar to trademarks registered in the same jurisdiction, the cost of filing for and maintaining patent rights is typically higher. Nevertheless, there are always exceptions to the rule, and trade secrets are a wildcard in intellectual property. These assets are notoriously difficult to assess objectively in terms of dollars and cents.

Take the Coca-Cola recipe, which is arguably the most valuable trade secret. One can nearly declare with absolute certainty that not a single patent held by that corporation is worth as much as the formula for its main product. On the other hand, the trade secret underlying McDonald’s special sauce is a significantly less valuable IP asset than the trademark defending the McDonald’s logo. As expressed, a formal valuation is the only way to ascertain the precise value of any intellectual property asset rather than relying on broad assumptions.

How is the IP value determined?

There are three primary approaches, each with benefits and drawbacks:

  • Income: According to the World Intellectual Property Organization, this method is the most popular for estimating the value of IP (WIPO). The “amount of economic revenue that [the asset] is predicted to generate, adjusted to its present-day value” is old as the basis for calculations. The royalty income from the licencing structure would be your starting point if you intended to licence the item. However, this technique assumes that future revenue is reasonably predictable and will continue to be stable. Additional variables are secondhand to account for risk, yet uncertainty will inevitably exist in any projection.
  • Cost: This value approach evaluates the expense of creating a particular IP asset. Let’s say you are worried about wasteful spending on R&D and other routine tasks. In that situation, a cost-based appraisal might assist in calculating the anticipated cost to produce a comparable or identical IP. The method’s drawbacks are that it only applies to readily replicate IP and ignores an asset’s novelty or commercial potential.
  • Market: A market-based IP valuation is a comparative process, much like the cost approach. It determines the cost for a party to acquire an intangible asset comparable to the appraised one bought under usual circumstances. The European Union Intellectual Property Office (EUIPO) asserts that similar to the valuation of tangible property, this approach may be the best choice for people new to IP transactions. Finding an analogous IP asset for a less well-known product, like specialised computer software, can be time-consuming and labour-intensive.

Understanding the valuation context, the business environment, and the intended objective in great detail is necessary for choosing the correct methodology. The future earnings potential is not considered by either market- or cost-based assessments because they are fundamentally retroactive. On the other hand, the income technique is vulnerable to market volatility and changes in strategic priorities because it is a prospective estimate.

A valuation analysis may also consider other factors, such as the potential for renegotiated licencing agreements or the damages at stake in a patent infringement lawsuit (in a highly competitive economy).

Why is your IP valuable?

An IP valuation project can play a crucial role in the development of a business, especially during periods of rapid growth and market expansion. Looking at your books enables you to highlight what you have to offer in the event of a merger or illustrate the financial heft of your portfolio during purchase discussions. You can increase your prospects of obtaining investment funding and make more intelligent business decisions during joint ventures by evaluating the worth of your IP assets, both individually and as a portfolio.

Regarding the monetary worth of your intangible assets, the professionals at Dennemeyer Consulting are always available to offer advice and actionable insight.


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