In developed and developing countries around the world, there is an ever-growing shift toward the knowledge economy – industries based on innovation and intangible assets. In such a climate, businesses that base their operations on intangible assets and innovation are far more likely to succeed. To truly benefit from the intellectual property a business possesses, it is vital that the business understand its worth. However, the precise monetary value of intellectual property can be challenging to determine. Nevertheless, you can always refer to the experts in this field such as HeerLaw for advice or for additional help. This article will discuss reasons for conducting an IP valuation and some factors to consider when valuing intangible assets.
Why you should bother to value your intellectual property
Conducting a valuation of your intellectual property can have significant benefits. Valuation is an important precondition for ensuring lucrative monetization. For example, assessing the value of your patent, trademark or copyright will enable profitable licensing arrangements, or in the case of an assignment, will ensure that you receive adequate consideration in exchange for the grant of rights. Valuation can also help determine appropriate royalty rates. Further, determining a reasonable valuation for your intellectual property, if not currently accounted for, increases the overall valuation of your business and provides you with collateral for loans or other debt.
Methods for valuing your intellectual property
The value of intellectual property can be determined by many factors, but the overarching principle guiding valuation is how much of a competitive advantage over others in the industry your intellectual property provides.
When determining the worth of intellectual property, two methods of valuation have traditionally been used: (1) quantitative valuation and (2) qualitative valuation.
- Quantitative Valuation
Quantitative valuation relies on numerical information to produce an estimate of the value of your assets. Evaluated metrics may include (1) assessment of similar market transactions in the industry, (2) assessment of the cost incurred in obtaining the intellectual property in question, (3) attempts to calculate the present value of future profits that will come to the firm as a result of the IP asset and/or (4) the cost of replacing the gains made by the intellectual property in question with another method.
There exist other, less commonly used methods of quantitative valuation that often encompass elements of the larger umbrella methods described above but may focus on obtaining specific metrics. Such methods include the brand value equation method, liquidation value and income differential analysis. Depending on the purpose you have for your prospective IP valuation, one or more of these methods may be helpful.
- Qualitative Valuation
Qualitative methods of valuation attempt to provide a non-monetary estimate of the value of intellectual property by rating it on the basis of less tangible metrics. These may include an estimation of value on the basis of (1) the intellectual property’s strategic impact, (2) brand loyalty held by consumers, (3) the intellectual property’s impact on the company’s future growth, and/or (4) the competitive advantage that is brought by intellectual property by comparing it to other non-branded companies in the market (among other intangible metrics that do not rely solely on numbers).
Any of these assessments will rely on qualitative approaches to the data at hand including what would likely be a combination of rating and scoring systems, comparison methods and value assessments.
Because of their largely non-monetary nature, qualitative methods are often used for internal and/or strategic purposes. They can be used to understand the profitability of an IP portfolio and evaluate opportunities and risks, and to develop an overall strategy for your business.
Which method is best for me?
The method that will best serve your intellectual property needs is highly dependent on the goals you have set as a result of valuation. Whether your valuation will be used for internal or external purposes, the type of audience that the valuation results will be presented to and the scope of valuation necessary are all important factors to consider.
Before proceeding with selecting a method, it may be beneficial to establish the following:
- What is the purpose to this valuation?
- What assets will be the subject of this valuation?
- For whom is this valuation being prepared?
Once you have established answers to these questions, choosing the best evaluative method will be a simpler and more obvious process (especially bearing in mind that these two types of valuation should not be treated as mutually exclusive).
Why bother with valuation at all?
Determining the value of intellectual property can be a challenging process, but obtaining a valuation can result in significant benefits for your business. An accurate estimate of the worth of your intellectual property can guide your business decisions and help you determine a course of action to take with the assets in your possession, which will be most profitable for you.