Why Intellectual Property (IP) Valuation is crucial to sell a business?

Intellectual property (IP) in many companies is one of the main assets, and unlocking its potential is an essential part of any business sale. A variety of methodologies can be used to arrive at the IP valuation of assets such as the patents, trademarks or logos, copyrights, and trade secrets.

What is it about these IPs that make them so important to a company?

  • Patents and designs that have been registered prohibit rivals from introducing similar, competing products/ services and eventually not allowing them to compete and hurt your market share in the relevant space/ industry.
  • Your company’s image and reputation as a forward-thinking organisation will be more secure and can be enhanced overtime.
  • Having the rights to a product/ service concept can allow your company to sell one or more products/ services to your target market and pricing those accordingly,
  • The authorisation for the IP, which can used by you to import and market those product(s)/ service(s), offers a major and valuable revenue source if you are a design-only company.

However, there is no one form of valuation that may suffice for a company sale; the most appropriate method is determined by several considerations, including whether or not the intellectual property rights (IPR) are properly protected, functioning and will continue to generate real value in the medium to longer term. Where the overall company value may be largely driven by the IP, the Intellectual Property valuation becomes especially important. This is certainly true for companies operating in the tech, biotech spaces, companies with strong brands, patents, etc., where the IP value may form a substantial part of the company value. 

Income or Economic Benefit Valuation:

The income method of IP valuation, also known as the economic gain method, attempts to determine the potential income that a company’s IPR will produce, as well as the costs of extracting that income – in other words, the business’s economic benefit over the IP’s useful economic life.

In comparison to the expenditure approach, the benefits method bases its valuation on possible future scenarios rather than actual incidents. This can be problematic in and of itself, considering the complexity of predicting or projecting over many years and estimating the usable economic life of IP assets.

Market Based Valuation:

To arrive at a valuation, the market value equation uses a product’s output in the market. For reference, transactions containing identical goods are often used. Again, there are pros and cons of this form of valuation.

Market value is a reasonably reliable measurement basis since it is dependent on supply and demand in the industry, but there are not a lot of readily available information to compare it to other products/ services. However, if sufficient evidence is available, the market approach is widely regarded as a useful method of valuing IP because it considers consumer/ commercial behavior.

IPR, in general, significantly increase a company’s valuation, but the most suitable means of IP valuation will differ depending on the company, industry it operates in and its business lifecycle. To arrive at an appropriate valuation assessment, you need to know about the economy, the market in which the company operates, and the business itself.

Cost Based Valuation:

The cost approach is based on the expenses borne by the company in the production and development of the IP. It also considers the costs of recreating such an IP or producing say a software that is comparable in features, functionality and design in the IP valuation.

Using the cost method in the Intellectual Property valuation is based on the idea that a company buyer would not have to pay these costs if they bought the IPR. In addition, they would avoid the financial and/or organizational consequences of failing to develop their own IPR, as well as dealing with the possible problems of protecting it if they did develop their own.

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