What You Should Know About Intellectual Property Valuation

 

As technology continues to shape the global economy, many businesses, particularly those that are technology-based, are discovering that intellectual property (IP) now accounts for the majority of their value. As a result, rules governing are changing the intellectual property valuation all across the world.  Intellectual property is frequently difficult to assess, describe, and price appropriately due to its intangible character. As a result, for global businesses involved in IP transactions, accurate value is critical.

Importance of intellectual property valuation:

Over the last four decades, the move to a global service economy has upended traditional ideas of value. Physical assets no longer account for the majority of corporate value in the new service- and technology-oriented economy. The value of Ford or GM in 1960 would have been largely in their manufacturing facilities and inventories; by contrast, the value of Tesla now is primarily in the company's underlying technology and intellectual property, rather than the automobiles it produces.

Other manufacturing firms are in the same situation. In most industries, IP is growing more essential for manufacturers, as their trade secrets and other intangible property are what set them apart from rivals.

In order to determine sales, licensing, or transfer price for IP assets, as well as for merger and acquisition (M&A) activities, assessing the Intellectual Property valuation is important. However, IP value is challenging due to the complexity of valuing intangible assets and the constantly changing rules regulating of IP valuation, which differ from country to country.

Methods for Intellectual Property Valuation:
When it comes to valuing intellectual property, there are two common approaches.

Income Method: Intellectual property valuation based on the IP's expected future cash flows.

Market Method: To estimate a market price, IP valuation relies on observations of real third-party transactions of comparable intellectual property.

Different intellectual property valuation methodologies can produce radically disparate outcomes, which is why it's critical for firms transferring IP across subsidiaries to select the most appropriate approach. The most trustworthy approach is not always the one that produces the best financial results for the company, but rather the one that is fair to both parties in the IP transaction—and defendable in the event that tax authorities challenge it.

Ideas for Getting Reliable IP Valuation Results

IP valuation is not just the most complicated and contentious element of intellectual property valuation businesses' work, but it's also the sector with the most substantial planning and optimization potential. Here are some suggestions for managing and valuing IP assets:

Be practical and logical:

If the financial rewards associated with certain intellectual property appear to be too good to be true, they most likely are. It's probably not the most trustworthy intellectual property value methodology to apply if both the buyer and the seller find the results too appealing to one side or the other.

Evaluate the potential outcomes:

Conducting testing to assist assess the outcomes for both the buyer and the seller is one of the best practices to follow. You may be certain that the techniques used are reliable if it appears that both the buyer and the seller would consider the IP transaction to be economically fair.

Expect valuations to be disputed:

IP valuation is contentious, and tax authorities frequently disagree. As a result, taxpayers should approach IP valuation with caution. Companies should pick the intellectual property valuation technique that is the most defensible in the case of a dispute, not necessarily the one that produces the most appealing financial results, as previously stated.