Are you maximising the Valuation of your Intellectual Property Strategy ?
Understanding the value of your intellectual property is essential for tactical and strategic decision-making. This knowledge can become a competitive advantage in many areas.
Definition and Categories of Intellectual Property
The World Intellectual Property Organisation ("WIPO") refers Intellectual property (IP) to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce.
Intellectual Property ("IP") generally includes:
Trade secrets including confidential information and know-how with commercial value
Layout designs including integrated circuits
Financial Recognition of Intellectual Property
Intellectual Property are considered to be intangible assets. Based on International Accounting Standard 38 (Intangible Assets), the three critical attributes of an intangible asset are:
Control (power to obtain benefits from the asset)
Future economic benefits can be quantified
IAS 38 requires an entity to recognise an intangible asset, whether purchased or self-created (at cost) if, and only if:
It is probable that the future economic benefits that are attributable to the asset will flow to the entity; and
the cost of the asset can be measured reliably.
Intellectual Property Strategy
1) Identify the IP
The IP strategy of a company should not be left to the legal department. We live in a knowledge economy today. Robert Solow, the Nobel Prize-winning economist showed that as much as 80 percent of GDP growth is contributed by new technologies and innovation. An IP can be developed internally or with others. In addition, the IP could be licensed from third parties too. In an M&A scenario, the IP can also be acquired.
An internal IP audit can be conducted to identify the IP portfolio of the company.
2) Protect the IP
IP can be protected by legal means such as filing for patents, trademarks or copyrights. This process takes time and can be expensive.
3) Monetise the IP
This can be through licensing the IP to third parties or simply using the IP as part of a Company's product and services portfolio.
4) Valuation of the IP
The valuation of the IP allows the company to understand the risk and return profile of the IP considering the R&D investment by the company to develop the IP. In addition, when the company is preparing for an IPO, understanding the valuation of the IP portfolio can help justify the IPO valuation.
The Importance of Valuing the Company's Intellectual Property
There are four main reasons why a Company should understand the valuation of its IP:
Securing Financing: If the IP assets are separable and can be valued, there is a greater chance that the IP could be used as collateral to obtain financing. It is important to show that the IP assets will remain valid, at least for the duration of the financing repayment period. They should also remain marketable in the event of foreclosure or bankruptcy.
Licensing and Franchising: Understanding your IP assets in detail and knowing the valuation will help in better negotiations in licensing and franchising agreements. This includes knowing the royalty rates to charge.
Settling disputes: Through IP valuation you will be better able to decide whether to pursue the court route, to opt for alternative dispute resolution, or even whether to consider licensing the asset to the infringing party. IP valuation also plays an important role in calculating damages.
Attracting investors and partners: Before investing in a company, venture capitalists need to know the value of that company's IP. Proper valuation of IP assets can therefore help win over such potential investors. In addition, if you're considering a joint venture, strategic alliance, merger or acquisition, IP valuation can assist in understanding how much value the IP assets of all parties contribute to the partnership.
Having the Right IP Strategy is essential for a successful IPO
The IPO prospectus helps the regulators and investors to understand the Company's strategy and operations. In addition, there will often be discussions about the IP of the Company. It is essential that the Company has sufficient financial information and metrics on the IP portfolio. This includes the valuation of the IP portfolio, the valuation methodology and the key assumptions.
Methods to Value Intellectual Property
Specialist valuers would rely either on the Income, Market or cost methods to value the IP. And for each method, there would be several sub-methods. The valuation of the IP should always be assessed on a case-by-case basis.
The key factors to consider when valuing an IP include:
Clear identification of the IP.
Unambiguous title to the asset.
Qualitative and quantitative characteristics of the IP.
Earnings capacity and profitability relating to the IP.
Market share supported by, or as a result of, the IP.
Legal rights and restrictions, competition, barriers to entry, and risks associated with the IP.
Product life cycles and positioning.
The proportion of GDP in developed countries that is based on the knowledge economy and the intangible assets will continue to grow. Companies need to pay more attention to their IP, have a systematic framework to manage the IP, and understand the valuation of the IP.