IP Valuation: How To Measure What You Can Not See
In recent decades, the value of intellectual property (IP) assets has increased. Sometimes an organization’s IP valuation is much more than its physical assets, real estate, or other holdings combination.
To make the most of this “secret” treasure trove, particularly in these uncertain economic times, an estimate of your intangible assets is necessary. However, this activity is more difficult than just taking a box apart and counting the cash inside..
The value of IP today
The total amount of intangible investments made by S&P 500 companies has grown since the mid-1990s, according to a 2020 research, increasing from $3.12 trillion USD in 1995 to $9.28 trillion in 2005 and $21.03 trillion in 2018. When physical assets controlled the balance sheets in 1975, the value of all S&P 500 companies’ intellectual property (IP) was only $122 billion USD.
And since, the rapid rate of technological advancement, the increasing importance of brand recognition in globally connected trade, and the toughening of international accounting standards have all worked together to guarantee a move in the fortunes of meaningful assets, one that has convincingly pushed intangible assets to the frontline.
IP’s relative weight has also markedly expanded over the same period of time as its net worth. The market value of the S&P 500 businesses’ IP grew from 68 percent in 1995 to 90 percent in 2020. It is plausible to assume from these numbers that IP will deliver more relative and absolute value to the majority of publicly traded companies in the years to come, ignoring the COVID-19 pandemic’s negative effect on economic growth.
What are the different types of IP worth?
Of course, specific examples vary dramatically from asset to asset. However, it is true to say that patents often have a higher value than the other three primary types of IP: trade secrets, copyrights, and trademarks.
Physical assets’ values fluctuate according to respect to various trends, but IP is far more unique and needs a professional’s perspective to be evaluated correctly.
This results from both the work required to get such rights as well as the given to highlight of what patents protect, namely the creativity and exclusive ownership of an innovative product or solution. The application to approval cycle for a trademark is usually far shorter than the process for receiving a patent from a national or regional IP office. For example, the United States Patent and Brand Office usually requires 12 to 18 months to register a trademark (USPTO).
In an example, the typical overall number of pending for a patent at the same office—the time from original filing to finalisation 24.4 months. Another thing to keep in mind is that, despite unfiled patents, even unregistered trademarks can offer some level of legal protection. Similarly for trademark registration in the same jurisdiction, registering for and maintaining patent rights usually costs more money. Nevertheless, there are always exceptions to the rule, and in the case of intellectual property, trade secrets are somewhat of a risk. These assets are famously challenging to evaluate accurately in terms of money and cents.
Take the Coca-Cola formula, probably the most valuable trade secret in business. One can nearly declare with complete confidence that not a single patent held by that corporation is valuable as the formula for its main product. On the other hand, the trade secret behind McDonald’s special sauce is a significantly less valuable IP asset than the trademark protecting the McDonald’s logo. Simply expressed, a formal evaluation is the only way to determine the exact result of any intellectual property asset instead of depending on broad assumptions.
How do you calculate the IP valuation?
- There are three primary strategies, each with advantages and disadvantages.
- Income: According to the World Intellectual Property Organization, this technique is the most popular for calculating the value of IP (WIPO). The “amount of economic income that [the asset] is expected to produce, relative to its present-day value” is used as the ground of calculations. The royalty income from the licencing structure would serve as your starting point if you wished to licence the item. But in order to use this method, it must be considered that future income is predictable with a sufficient level of confidence and will be pretty constant. Risk is taken into account using additional factors, but as with any estimations, some level of uncertainty is unavoidable.
- Cost: This value model evaluates the expense of creating a certain IP asset. A cost-based valuation can help to determine what expenditure would be assumed to develop a similar or identical IP if you are worried about wasteful spending in R&D and similar day-to-day activities. The method’s disadvantages are that it only applies to easily reproducible IP and ignores an asset’s uniqueness or marketing value.
- Market: A market-based IP valuation is a similar process, much like the costing method. It determines the cost for a party to purchase an intangible asset identical to the one that is evaluated and bought under proper conditions. The European Union Intellectual Property Office (EUIPO) says that because this method is similar to the valuation of tangible property, it may be the best option for people new to IP transactions. Finding an equal IP asset for a less well-known product, such as specialised computer software, might be challenging.
Understanding the valuation scenario, the business environment, and the desired goal in great detail is necessary for choosing the right technique. Future earnings possibilities are not considered by either market- or cost-based valuations because they are fundamentally reactive. The income technique, on the other hand, is subject to market uncertainty and changes in strategic priorities because it is a future estimate.
Evaluating IP is highly complicated, starting with choosing the best method. The features of the asset under review (such as the quantity, variety, and use of assets) and the planned application of the valuation results affect this decision.
Additional factors that could impact market research and, as a result, the choice of strategy range from the opportunity for amended licencing agreements to the damages at risk in a patent infringement action (in a highly competitive economy).
Why value your IP?
A company’s development can profit from an IP evaluation study, especially during fast growth and market development. Looking at your books helps you to highlight what you have to offer in the event of a merger or showcase the financial power of your business during purchase discussions. You can improve your chances of acquiring investment funding and make more smart business decisions during strategic partnerships by evaluating the value of your IP assets, both independently and as a property.
When it comes to the actual worth of your intangible assets, the specialists at Menteso IP Consulting are always available to provide guidance and knowledge that can be fully implemented.