A study carried out in 2018 showed that 84% of the company value of all S&P 500 companies was made up of intangible assets, while only 16% was comprised of tangible assets. This shift towards finding value in non-traditional assets has been going on for some time, and in today’s world, companies have become behemoths on the backing of their intellectual property. Therefore, it is clear that IP has become a vital aspect of finding value, and is something companies should keep as a priority.

There are three major ways to determine the value of the intellectual property:

• Cost-based approach

  • The development cost of the IP is the major aspect of the value under this approach

  • The value of the property is measured in terms of the expense in making or acquiring it

  • The issue with this approach is that it fails to address any potential future gains stemming from the IP, which in many cases can be substantial

• Market-based approach

  • The value of the IP is determined by the value of its competitors in the marketplace

  • It is a comparison based approach in which a property’s value depends directly on how well its competitors are doing

  • A major problem with this approach is that it is often difficult to find an appropriately comparable asset in the marketplace

  • An imperfect comparison might be detrimental to the value as it might not take into account some redeeming feature of the IP which is not present in the competitor’s asset

• Income-based approach

  • In this approach, a forecast of potential future income stemming from the IP is used to determine its value

  • The primary income sources from IP stem from licensing fees, and those form a huge part of this valuation approach

  • These valuations try to use real-life historical data and market research wherever possible, but sometimes that is not feasible

While evaluating their IP, companies should take all three approaches into consideration, as no single one is comprehensive enough to give an accurate result. However, it is almost impossible to determine the accurate value of any intellectual property, simply due to its nature. Companies should strive to secure an accurate estimate, but they should also focus on reaping the benefits of the value that their IP holds.

There are many parts to take into consideration while determining how to best use the value of the intellectual property for financial gain.

• Companies should have regular IP audits done by professionals, to determine what exactly the value of the IP owned by the company is and if any of it needs protection. All intellectual property might not be registered in the name of the company. For example, copyright requires no registration. Hence, a thorough audit is necessary to determine the exact value of the company’s IP.

• Identifying the most valuable parts of a company’s IP, and protecting them stringently is absolutely essential. This may be a special ingredient or manufacturing process, and it is vital that companies protect their IP and prevent it from getting leaked.

• Identifying the return on investment on the IP is another process that needs to be carried out. Companies need to know when their IP will start yielding results. Every piece of intellectual property might not start achieving financial gains for the company immediately but might hold immense value in the future. Companies need to ensure that they are cognizant of all these factors while determining the value of their IP.

• Companies must make sure that all the IP that is registrable is registered under their name. The obvious result of this is that those properties have the protection of the law, but apart from this, having intellectual property assets registered to their name will increase the value of the companies, and this, in turn, will give them more leeway while conducting business operations.

• Patented products or registered trademarks can and should be licensed to other parties, as licensing fees can be a great way to generate revenue for the company. This licensing should however be done after exercising proper due diligence and making sure that the licensee does not sell a sub-par product which may affect the reputation and goodwill that the company has built over the years.

• If the value of a product is established in the marketplace, this can be a great help in determining the price of the underlying IP. If a company is aware of how profitable a product has been, it can use that as a baseline to work out how much a license fee for that IP might be. IP can also be sold outright, but such a decision must be taken with great care and thought because by selling its IP, a company might be giving up a much more profitable revenue stream. A sale is a one-time deal, but IP has the potential to be a constant source of revenue for a very long time.

• Being aware of the value of IP can also be very helpful during mergers. If a company knows how much its IP is worth and the potential it has as an asset, it can be used as a bargaining chip to drive up the price of the acquisition or to change the distribution of shares in the merger contract.

• Valuation of IP must be done taking into account its economic life. All potential sources of revenue from the IP should be considered, be it licensing agreements, higher product sales, or future products based on the same IP. Possible risks must also be taken into account while evaluating any IP. Potential costs of defending against IP infringement, change in the market size, and the potential of a stronger competitor are all factors that can influence the value of any intellectual property.

To know more about How Intellectual Property is a new class of asset in the balance sheet, see the video below-

BY-

Shivalik Chandan