Intellectual Property Valuation

BlogIntellectual Property Rights    June 29, 2022
Intellectual Property Valuation Posted On

The non-physical property of a business comprises Intellectual Property (IP) assets. Such assets are well-protected legally, and this protection could be enforced in a court of law. They possess an economic lifespan, can be identified independently, and are transferrable.

About Value of an IP Asset

  • EXCLUSIVITY – An IP asset’s value comes from its owner’s right to exclude others in the market from using it. For an IP asset to possess a quantifiable value, it should generate a measurable amount of economic benefits for its rightful owner and enhance the value of other assets associated with it.
  • FUTURE BENEFITS – An IP asset’s value suggests the potential future economic benefits to its rightful owner or authorized user. The value of an IP asset could be derived through its direct exploitation within a product, selling or licensing it to some third party, or by other means like raising barriers to entry or reducing the threat of substitutes.

Understanding the Basics of IP Valuation

IP valuation, in simple terms, refers to the process of determining the monetary value of your IP assets. For selling, licensing, or entering into any commercial agreement based on your IP, you require putting a value on it. IP valuation plays a significant role in the enforcement of Intellectual Property Rights (IPRs), internal management of IP assets, and handling of various financial processes.

For placing a value on your IP asset, it must fulfill the conditions mentioned below:

  • It should be identified separately, i.e., subject to some particular identification, along with a recognizable description;
  • It should have tangible evidence of existence in the form of a contract, license, record in financial statements, registration document, and so on;
  • It should have been created or invented at some identifiable point in time;
  • It should be capable of being enforced and transferred legally;
  • It should possess an income stream separately identifiable and isolated from those of the other business assets;
  • It should be capable of being sold independently of other business assets; and
  • It should be subject to termination or destruction at some identifiable point in time.

Exploring IP Valuation in Practice

  • Securing Financing – If you are willing to use your IP assets as collateral to secure financing, you have much greater chances of success, provided your assets could be valued separately from your business. In this scenario, it becomes imperative to prove that the IP assets shall remain valid, at least during the financing repayment period. Moreover, they should remain marketable in the event of bankruptcy or foreclosure.
  • Attracting Partners & Capitalists – Before investing in a business company, venture capitalists and partners need to know the value of that company’s IP assets. Therefore, it won’t be wrong to say that an adequate valuation of IP assets can help immensely in winning over potential investors who usually search for maximum return and minimum risk. Furthermore, if you are looking forward to having a strategic alliance, joint venture, acquisition, or merger, IP valuation can help you understand how much value IP assets belonging to different parties contribute to the partnership.
  • Licensing & Franchising – Having an in-depth understanding of your IP assets before entering into licensing agreements shall help you make much more informed decisions concerning the terms and conditions of such an agreement. Additionally, knowing your IP assets well shall make you aware of fair royalty rates. In franchising agreements as well, both the franchisor and franchisee need to possess a thorough understanding of the value of IP assets.
  • Resolving Disputes – If you know the value of your IP asset, you can conveniently choose the strategy to employ in the event of its infringement. Through IP valuation, you shall be better able to decide whether to take the matter to court, consider licensing the IP asset to the infringing party, or opt for an alternative dispute resolution. Last but not least, IP valuation plays a significant role in calculating damages.

Principal Methods of IP Valuation

  • INCOME METHOD – It is the most commonly and widely used method for IP valuation. It values the IP asset in question based on the economic value amount that it is expected to generate, further adjusted to its current-day value. It is the most convenient method to be used for IP assets that have:
  • Positive cash flows
  • Cash flows that can be estimated with some degree of reliability for future time periods
  • A proxy for risk that can be used to obtain discounted rates
  • COST METHOD – This method establishes an IP asset’s value by calculating the cost of a similar, identical, or exact IP asset. It is specifically beneficial when the IP asset can be easily reproduced or when its economic benefits can’t be accurately quantified. Kindly note that neither does this method account for wasted costs nor consider any novel or unique characteristics of the IP asset.
  • MARKET METHOD – This method focuses on the comparison of the actual price paid for the transfer of rights to a similar or identical IP asset under comparable circumstances. Since this method is based on market details and info, it is quite often used to establish the approximate values for use in finding out royalty rates, tax, and inputs for the income method. ✅ For more visit:

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