3 Methods to Value Your IP Assets
Many business owners may be unaware of the value of their intellectual property (IP) assets. In some instances, a business’ IP can be one of the most valuable assets that it owns. However, there is no clear-cut method to valuing your IP, and ultimately the real value of your IP will only be determined once it is sold or transferred at an agreed price. This article outlines the:
- reasons why valuing your IP assets might be necessary;
- three common methods practitioners use to value IP; and
- steps you should take to value your IP assets.
Why Value Your IP Assets?
Business owners conduct IP valuation for a variety of reasons. IP valuation can be important for accounting and taxation purposes when assessing a business’ assets. The IP owner can also undertake it because of general interest. IP valuation is also important in instances where you want to:
- use your IP assets as collateral for obtaining finance for your business;
- attract venture capitalists to invest in your business;
- negotiate licences for others to use your IP assets; and
- settle legal disputes if someone has infringed on your exclusive rights to use your IP assets.
Whichever reason you choose to value your IP assets, it is important to remember that the value determined by a practitioner is a close estimate of the value of the IP and not its absolute value. Only once the IP asset is sold or transferred can you determine the asset’s true value based on the agreed transaction price of the IP.
Qualitative vs. Quantitative Valuation
You must be aware that IP has both a legal and an economic value despite being an intangible asset. Since the law creates and protects your IP asset, practitioners can define your IP asset in terms of its qualitative characteristics. For example, the value of a trade mark from a legal perspective would consider the goodwill of the business it represents.
On the other hand, since IP can be sold and transferred, it has a quantitative value. For example, the value of a trade mark from an economic perspective might consider whether the trade mark can be readily licenced.
Both these perspectives come into play when determining the value of the same IP asset. For example, a patent that you have not used to produce your goods might have no economic value. However, the patent is in legal existence and therefore has some qualitative value. With this in mind, below are three different valuation methods that practitioners typically use to value IP assets.
Method #1: Income Method
Practitioners most commonly use the income method to value IP assets. The income method determines the value of your IP based on the expected future earnings of your IP. Practitioners then adjust this amount based on the present value of your asset. Practitioners use the income method when your IP is generating an ascertainable income. For example, if you regularly licence your copyright to other businesses, a practitioner might determine the value of your copyright based on the income method.
Method #2: Market Method
The market method is useful when determining the value of your IP if there are comparable assets that exist in the market. Under the market method, practitioners value your IP based on the transaction price of similar IP assets with comparable features. For example, if a cafe owner has recently sold their trade marked logo to another business, a practitioner might value your similar trade marked logo at the same value as the sale price of the cafe logo.
Method #3: Cost Method
Another method practitioners use to determine the value of IP assets is the cost method. Practitioners can determine the value of your IP by calculating the cost of a similar or an exact IP asset. However, the cost method does not necessarily account for any unique characteristics of your asset and relies on equivalent IP assets to be in existence.
Preparing for an IP Valuation
Before you take steps to value your IP, it is important that you first determine what IP assets your business owns. You can do this by conducting an IP audit.
An IP audit is the systematic review of a business’ IP that it owns or uses in its day-to-day operation.
Although there are no formal requirements that a specialised person conducts an IP audit, specialised practitioners who have expert knowledge in identifying IP usually conduct them. The practitioner can work alongside a representative of your business’ management to help identify the IP within the business.
IP audits are important for IP valuation since the valuation process requires information about the IP assets within your business. Upon completing an IP audit, the person who conducts the audit usually compiles a database to keep track of the IP assets within your business, making IP valuation a more straightforward process.
An experienced practitioner familiar with identifying IP assets and using different methods for IP valuation usually conducts an IP audit. However, you should note that IP valuation provides a close estimate of the value of your IP asset at the time of valuation. The transaction price at which your IP asset is sold or transferred will determine the absolute value of your IP asset. If you need further legal assistance with IP valuation or trade mark legal assistance, our experienced trade mark lawyers can assist. Call us on 1300 657 423 or complete the form on this page.
Frequently Asked Questions
The value of your IP depends on a range of factors, including its utility and the goodwill of your business. In the instance of a trade mark, the goodwill of your business is usually the value of your IP.
It would be wise to contact a specialist practitioner to undertake the valuation.
This depends on how many IP assets your business owns or uses. However, you can minimise the time it takes to value your IP assets by conducting regular IP audits. This will ensure that your IP information is updated and readily accessible for the valuation process.