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What is your intellectual property worth?
October 11, 2024
Company values are increasingly based on intangible assets and investment in knowledge. Intellectual property (IP) can be a key part of the value of a company. Estimating the value of IP can be important for a variety of reasons, such as attracting investors or as collateral to obtain financing.
There is no single set of valuation rules which can be applied in every circumstance. Three main types of methods are used in valuing IP rights:
Income Method / Economic Benefit Method
This is the most commonly used method. IP valuation is based on both the future income which a right may generate during its economic life and the costs of generating that income. Risk and financial costs are factored into the equation. The end result is described as the ‘Net Present Value’ or NPV.
It should be remembered that this is based on an assessment of likely future events rather than past performance.
Market Method
IP valuation is based on observations of actual third-party transactions of comparable IP to determine a market price. The method relies on estimating the value of the IP asset based on similar transactions of similar IP assets. These may be sales or licences.
A key problem is that IP is, inherently, unique and so IP transactions are hard to generalise. As such, this method is not typically used for patents. This method is less beneficial to businesses that operate in sectors with fewer competitors as market data on recent transactions may not be available.
Cost Method
IP valuation is based on the costs incurred developing or creating an IP right (or a similar IP right). This does not take into consideration the current market value or future revenue the IP right could generate.
Cost-based methods are usually the simplest methods as most information can be gathered from accounting records. However, it may lead to significant overvaluation or undervaluation.
Summary
Valuations of IP are determined on a case-by-case basis and which method is best for you depends on the circumstances. If the value attributed to an IP right seem too good to be true, it’s probably because it is and another method may give a more useful figure.
The UK Intellectual Property Office provides some more information on valuing your IP, including a supporting checklist, here: Valuing your intellectual property - GOV.UK (www.gov.uk)
Stephen Jackson
Associate