How Beneficial It Is To Put A Price On Intellectual Property
Intellectual property is an intangible asset of a company that can profitably generate immense monetary benefits. A company legally protects these assets to prevent its use by outsiders without the company’s consent. With its ability to provide a firm with a competitive edge, defining IP as an investment aims to provide similar protective rights as for any physical asset.
A recent rise of initial public offerings (IPOs), high-profile mergers, acquisitions, and litigation has placed intellectual property (IP) into a critical global economic position. However, many organizations often fail to derive value or evaluate risks associated with their IP assets, even when those assets account for a high percentage of the company’s value.
With limited resources and bottom-line pressures from stakeholders, companies need a high return rate on their intellectual property (IP) investments and appropriate protection. Not taking action could pose a severe threat to the success of the organization.
How Can Companies Derive Maximal Wealth Out of Their IP?
Deriving value from IP assets can be through various means, like, direct exploitation via selling and licensing the IP asset or even owning it. Value is generated by this method by reducing customers’ negotiating power, offsetting supplier strength, mitigating rivalry, raising barriers for competitors’ entry, reducing the threat of substitution, etc.
Factors Influencing IP Valuation
Several factors determine the value of an Intellectual Property. Some of these principal factors are:
1. The value standard: Fair market value and Fair Price Value are the most commonly used standards of value. Standard of value is essential to conduct an IP valuation exercise. Fair market value (Market value) is the price at which an asset or a service passes on from a willing seller to a willing buyer. Fair price value (Fair price) is appropriate for use in post transaction purchases for price allocation. This price is based on the idea that market participants would use while setting the asset price. Whereas fair market value is considered more appropriate when used in exchanges, fair value is often based on value-in-use. As mentioned earlier, in an everyday situation, IP valuation is a process to evaluate an IP asset’s fair market value.
2. Purpose of valuation: To determine the premise for calculating value, it is necessary to understand its valuation. For instance, a valuation of an IP asset from the perspective of its market value and investment purposes would be completely different. For commercial purposes, market value is the appropriate factor.
3. Valuation method used: The methodology applied and assumptions made while using a particular valuation method affect IP assets’ value. Among three different ways, the Market Method is the most effective form of valuation. And the cost method is usually avoided by companies as it ignores the novel characteristic of an IP asset. However, the cost method helps determine Research and Development costs.
4. The comparative strength of an asset: An asset’s competitive strength ultimately determines an IP’s valuation in terms of its market share. The factors like consumer responsiveness and market distribution of a product or service determine an IP asset’s actual value. The threat of new entrants in the domain or its substitutes affects the value decided for an IP asset.
Principal Methods for Assigning Value to an IP Assets
Setting the valuation of an IP is a challenging process. Choosing the most suitable method for IP assets depends upon the purpose decided for using the result. There are three main methods to ascertain the value of an IP asset. These are:
1. Market method: The market method compares the actual price set for transferring rights to an IP asset similar to the asset in question. This is done under comparable circumstances. This method has the benefits of simplicity and is based on the market situation. This established approximate values to determine royalty rates, taxes, and inputs required for the income method.
2. Cost method: The cost method of IP valuation establishes an asset’s value by calculating a precisely similar IP asset price. The method is advantageous because the IP asset is easily reproduced or when the asset’s economic benefits cannot be quantified accurately. The plan neither accounts for wasted costs nor does it consider any novel characteristics of the asset.
3. Income method: This method is the most commonly employed method for setting a value for an IP asset. The income method is based on the amount of economic income expected to generate, adjusted to its present-day value. This method is the easiest to use for IP assets with positive cash flows. This method is used primarily for IP assets for which the cash flows can be estimated with some degree of future reliability and where a proxy for risk can be used to obtain discount rates.
An IP asset’s value is determined by the asset owner’s right to exclude competitors from exploiting it. To have a quantifiable value, an IP asset should generate a good amount of economic benefits for its owner and enhance other associated assets’ value.
IP valuation has many future benefits, like an IP asset’s value represents the potential economic benefits for the IP owner or authorized user. This revenue utilizing IP assets can be derived through several means like direct exploitation of the asset by using it to develop the product, by the sale or licensing to a third party, and by other means, such as raising barriers to entry or reducing the threat posed by its substitutes.
Need Expert Advice on Intellectual Property Valuation?
Today, conducting an accurate IP valuation can be very challenging and unavoidably essential—than ever before. With the help of a seasoned domain expert, your company can be confident about using the most appropriate IP valuation methods for its asset, significantly reducing the risks and penalties.
Our team of experts can do the same for your company. Let’s discuss the unique IP challenges you face and how we can work upon them to optimize its global business.