Best practices in intellectual property valuation

 

As technology advances and drives the global economy in the millennial era, many businesses, particularly technology-based businesses, find that IP valuation accounts for the majority of their value. Brands, patents, copyrights, and manufacturing methods are examples of intellectual property.

Guidelines and rules for valuing intellectual property are also changing across the globe due to differing legal legislation in various nations. The valuation of intellectual property entails putting a monetary value on a company's intangible assets. However, since intellectual property is intangible, it may be difficult to value and describe, making it difficult to assign a fair price.

Intellectual Property valuation is a crucial problem, particularly in the context of mergers and acquisitions, since a typical prospective acquire would claim to have collected a substantial quantity of intellectual property and want to be compensated for it. As a result, for global companies engaged in IP transactions, accurate value is critical. The value of the intellectual property may also be used to determine the value of collateral in a loan scenario.

Best practices in intellectual property valuation:

Method of Discounted Cash Flows:

This approach tries to calculate the IP value by calculating the present cash flows from that specific piece of IP throughout the asset's economic life. Due to the limited usable life of patents, free cash flows are projected during the patent's economic life, and the discount rate is computed using the time value of money and risk probability. To improve a patent's success, the projected free cash flows should also be modified.

Relief From Royalty Method:

This technique is based on the deprival value theory, and it calculates how much money a business would lose if it didn't own the intellectual property and instead leased it from a third party. If this agreement exists, the royalty reflects the rental charge that would be paid to the licensor.

The capacity to establish an acceptable royalty fee is contingent on particular conditions, and it necessitates the discovery of similar transactions and pricing involving third parties. To get an accurate estimate of revenue from intellectual property, you'll need a solid sales forecast. To make this approach work, a suitable capital cost must also be calculated.

Income Method:

This approach concentrates on the future cash flow generated by a certain piece of intellectual property. When utilizing the income technique, the accuracy of the anticipated prediction is essential, and the following factors are considered.

• Streams of revenue from product sales or patent licensing
• Estimation of how long a patent will be valuable.
• Specific risk factors are patentable, and they should be included in the value.
• A discount rate is used because IP assets have their own set of risk concerns.

Method of Venture Capital:

This approach also calculates the value of a patent based on the cash flows generated throughout the asset's lifetime. It varies from the Discounted Cash Flow Method in that it uses a set non-market based discount rate. It is typically 50% or in the 40-60% range, and no significant changes are made to improve the likelihood of a patent's success. Cash flows are assumed to be constant, and risk variables that are not related are grouped.

In conclusion, although this list of intellectual property valuation techniques is not comprehensive, it is recommended that two to three of them be combined to get a more accurate viewpoint and value to achieve a competitive edge.