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.
In 1975, physical assets dominated corporate balance sheets. At that time, the total intellectual property (IP) value of S&P 500 companies was only $122 billion. Since then, rapid technological innovation has transformed the business landscape. Stronger global brands, digital transformation, and stricter accounting standards have further increased the importance of intangible assets.
The share of IP in overall market value has also grown. In 1995, intangible assets represented 68% of the market value of S&P 500 companies. By 2020, that figure had increased to 90%. These trends suggest that intellectual property will continue to create substantial value for publicly traded companies in the future.
Types of Intellectual Property Value
The value of intellectual property varies from one asset to another. The four main types of IP are patents, trademarks, copyrights, and trade secrets. Among them, patents often carry the highest value.
Unlike physical assets, intellectual property does not have a fixed market value. Its worth depends on factors such as legal protection, commercial potential, market demand, and competitive advantage. As a result, professional IP valuation is essential for determining its true value.
Patents are often highly valuable because they protect innovative products, technologies, and processes. Obtaining a patent usually requires significant investment in research, development, and legal procedures. This investment often increases the patent’s perceived value.
Trademark registration is generally faster than patent approval. For example, the United States Patent and Trademark Office (USPTO) typically takes 12 to 18 months to register a trademark. In contrast, the average patent application process can take more than 24 months from filing to final approval.
Patents also involve higher filing and maintenance costs than trademarks. However, trademarks may provide some legal protection even before registration. This distinction can affect the overall value of each IP asset.
The Challenge of Valuing Trade Secrets
Trade secrets are among the most difficult intellectual property assets to value. Their worth depends on confidentiality, market relevance, and business impact.
A well-known example is the Coca-Cola formula. It is considered one of the most valuable trade secrets in the world. Many experts believe it is worth more than any individual patent owned by the company.
However, not all trade secrets have the same value. For instance, the trade secret behind McDonald’s special sauce is likely less valuable than the trademark protecting the McDonald’s brand and logo.
These examples highlight an important point. The value of intellectual property cannot be determined through assumptions alone. A professional intellectual property valuation is the most reliable way to measure the true worth of any IP asset.
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 Income Approach values an asset by estimating the economic income it is likely to generate in the future and converting that income into its present-day value. If you plan to license the asset, projected royalty income often serves as the starting point for the valuation. This method works best when you can forecast future income with reasonable confidence and expect relatively stable earnings over time. Valuation experts also apply risk-adjustment factors to account for market uncertainties and other potential challenges. However, because the method relies on future projections, some degree of uncertainty remains unavoidable.
- Cost: This value model evaluates the expense of creating a certain IP asset. A cost-based valuation helps organizations estimate the cost of developing a similar or identical intellectual property asset, making it easier to control R&D expenses and reduce unnecessary spending in day-to-day operations. 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. This valuation method measures the cost of obtaining an equivalent intangible asset in the open market. 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. Valuation experts use market- and cost-based methods to assess existing value, but these methods overlook future earning opportunities. The income technique, on the other hand, is subject to market uncertainty and changes in strategic priorities because it is a future estimate.
IP evaluation requires careful analysis, starting with the selection of the most appropriate valuation 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.
Menteso IP Consulting helps businesses unlock the full value of their intangible assets through expert valuation and strategic guidance.