Everything You Need to Know About Valuation of Intellectual Property

Everything You Need to Know About Valuation of Intellectual Property

As technology continues to drive changes in the global economy, many organizations, particularly those reliant on technology, are discovering that Intellectual Property (IP) plays an important role in the value of the organization. As a result, policies governing the valuation of Intellectual Property are shifting everywhere.

What is Intellectual Property?

Intellectual property is an intangible asset developed by a company's labor or reputation. IP can include patented inventions, trade secrets, industrial designs, registered trademarks, unregistered trademarks, and copyright. Owning a range of properly protected IP can be a substantial part of the value of a company. A company with IP is much more likely to have a higher price tag than a company with no IP.

What Are the Methods Used for IP Valuation?

To value intellectual property, three methodologies are commonly used:

  • Income method: IP valuation is based on the IP's future predicted cash flows
  • Market method: Observations of third-party transactions of comparable intellectual property are used to calculate an IP’s market price
  • Cost-based valuation: Appropriate for new enterprises that are not yet well-established but have developed significant IP

Different IP valuation methodologies can produce radically disparate outcomes, which is why it is critical for organizations involved in intercompany IP transfers to select the most appropriate method. The most dependable technique is not necessarily the one with the best financial outcome for the company, but the method that is fair to both parties in the IP transaction and defendable if tax authorities dispute it.

Many aspects must be considered when deciding on the appropriate IP value method to adopt. The technique that is judged most reliable is determined by the availability of data, the type of IP being appraised and the business structure. Multinational corporations must consider all these aspects to determine which IP valuation methodology will produce the most dependable results.

How Can You Obtain Reliable IP Valuation Results?

Not only is IP valuation a complex and contentious component of what IP valuation firms do, but it is also a sector that requires substantial planning and optimization prospects. Here are some pointers for managing and valuing IP assets:

  • Be logical and pragmatic: If the financial gains associated with a specific IP appear too good to be true, it may be.
  • Consider the possible consequences: Conducting tests to help analyze the outcomes for both the buyer and the seller is a good practices to follow.
  • Valuations may be contested: IP valuation can be contentious and tax authorities may disagree with the valuation provided.
  • Seek expert advice: Few businesses have an in-house IP valuation expert, and knowledgeable assistance can help prevent future issues.

Why is IP Valuation Becoming More Important?

Over the last four decades, the transition to a global service economy has upended traditional concepts of value. Physical assets no longer account for most of the business value in the new service and technology-oriented economy. In many industries, IP is becoming increasingly crucial for manufacturers because it is their IP that distinguishes them from competitors.

Firms frequently invest in the creation of intellectual property, and there is a significant danger of squandered investment. Unless the value of the IP is determined, the company's balance sheet will represent solely the investment made in IP creation and the company may be undervalued as a result.

Defining the value of the IP can be helpful when calculating sales, licensing, or transfer pricing for IP assets, as well as merger and acquisition (M&A) activities. However, IP valuation can be problematic because of the difficulties in valuing intangible assets and the shifting legislation governing IP valuation. The method used to evaluate a company's IP might also differ depending on whether the valuation is being undertaken for accounting, tax or transfer pricing purposes.

Intellectual Property Rights can be invaluable for a company and can help improve market share. If you have IP that you are interested in protecting, contact us.