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Importance of IP valuation

“The only thing you really own is what you create; and the only thing you can create without needing someone else to give you raw materials first, is intellectual property”.
Caliban Darklock

Introduction

Intellectual property rights (IPR) refers to the legal rights given to the inventor or creator to protect his invention or creation for a certain period of time. It is widely acknowledged that intellectual property (IP) plays a critical role in the country’s economic growth. It has also been ascertained that the intellectual labour associated with invention should be given due consideration in order for public good to result.

IP valuation is the procedure where the monetary value of intellectual property is decided. Your intellectual property is what distinguishes your company and gives you a competitive edge. If you intend to buy, sell, or license intellectual property, you must conduct an IP valuation to determine the value of the IP assets in question. IP valuation helps in determining the real value of the company in its entirety.

Factors That Impact IP Value  

  1. Type of Protection
  2. Stage of development/commercial success
  3. Exclusivity
  4. Advantages
  5. Market size – current and future
  6. Patent/license remaining duration
  7. Licensee’s/licensor’s anticipated profits
  8. Scope/geographic territory of license
  9. Enforcement costs

Methods of IP Valuation

The principal methods for valuing IP assets are:

  1. Cost-based valuation
    • In this type of valuation method, the cost of the asset at the time of building the asset is taken into observation with the cost of the asset if recreated in upcoming years. The cost valuation method calculates the cost of equivalent (or exact) IP assets to determine the value of an IP asset. When the IP asset may be easily replicated and the financial advantages of the asset cannot be clearly measured, the cost method is found to be very potent. This valuation method does not examine any distinctive or innovative aspects of the asset, nor does it account for wasted expenses.
  2. Market-based valuation
    • To arrive at value judgments, market-based valuation examines comparable market transactions, whether sale or acquisition, of similar assets. This method is based on a comparison where the actual price paid for the transfer of the rights is compared to a similar IP asset. Because this approach is straightforward and based on market data, it is commonly used to produce approximate values to be used in setting taxes, royalty rates, or the inputs for the income method.
  3. Income-based valuation
    • Income-based valuation analyzes the stream of revenue associated with intellectual property based on previous profits and predicted future earnings. The Income based valuation method is the most generally utilized method for valuing intellectual property. It assigns a monetary value to the intellectual property asset based on the amount of economic revenue it is predicted to create, adjusted for its current market value. This strategy is best suited for IP assets with positive cash flows, cash flows that can be projected with some degree of certainty for future periods.

Conclusion

IP valuation has seldom been given the attention it deserves. The extent to which a company exploits and values its intellectual property is one of the factors influencing its success or failure. As you can see, intellectual property valuation is a very complex matter. The use of intellectual property assets to generate funds is not a short-term strategy. Businesses with strong intellectual property assets have a higher chance of success due to increased invested capital, a lower risk of insolvency, and a higher probability of a successful exit through initial public offerings.

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