A Primer on Intellectual Property Valuation
A Primer on the Valuation of Intellectual Property, Intellectual Capital, and Intangible Assets is presented by experienced expert witness and valuation professional Don Coker.
The most common types of Intellectual Property, Intellectual Capital, and Intangible Assets that need valuation are:
● Patents – Single patents or groups of patents that refer to a common technology.
● Trademarks – This includes recognizable logos, brand names, etc.
● Copyrighted assets such as written works, art works, music works, etc.
● Favorable factors such as favorable supplier contracts that offer an advantage over what a competitor would have to pay for the same materials.
● Customer relationship assets such as a core customer base, etc.
● Customer-centered assets such as customer lists, existing customer orders, etc.
● Workforce-related assets such as a trained workforce, loan origination network, established stockbroker network, established insurance agent network, etc.
● Real Estate related assets such as leaseholds, air rights, water rights, etc.
● Goodwill – The net present value of the excess earnings of a company (due to its superior performance) when compared to the earnings of other similar companies.
There are many other assets that can be categorized as Intellectual Property (“IP”), Intellectual Capital, Intangible Assets, or other similar terms. In the interest of brevity, I will refer to all of these categories as simply “IP.”
There are four key issues that need to be kept in mind when valuing, or reviewing a valuation of, IP assets:
1. Generally, the best reflection of the value of an IP asset is the Net Present Value of the reasonable future cash flows that will be produced by the asset. This means that particular attention must be paid to the future life of the asset.
2. Quite often, the most accurate methodology for valuing IP assets is to value them as if they were a stand-alone business. For example, a group of patents that all relate to a better copying machine would most likely be marketed as a bundle since some of the patents may rely on other patents within the group of patents.
3. In some cases, the value of an IP asset relates to an advantage that the asset provides over a competitor’s similar asset. For example, a favorable long-term supplier contract should be valued in terms of the net present value of the advantage in pricing produced by the contract over its life.
4. In some other cases, the value of an IP asset relates to the cost that was expended to develop the asset compared to what a competitor would have to spend to develop a similar asset. For example, the value of a trained workforce should be roughly equivalent to what it would take to reproduce a similar trained workforce.
There are many other complicating factors that are present in the valuation of IP assets, just to mention a few:
● Is the asset to be sold or licensed for some finite period?
● If the asset is to be licensed, will there be a single licensee or multiple licensees?
● If the asset is a patent, how many years has the patent been in use and how many years of
patent protection remain?
● If a patent application has been filed but a patent has not been granted yet, there is a risk that the patent application for the subject technology may be worthless.
Keep in mind that a unique group of skills will be required in order for a valuation consultant to produce a credible Intellectual Property valuation. Some of those skills include:
● Knowledge of the IP creation, ownership, and transfer process.
● Knowledgeable in many types of valuation methodologies.
● Knowledgeable in the principles of financial mathematics.
● Knowledgeable in corporate financing techniques.
● Knowledgeable in how to determine and analyze market factors.
● Knowledgeable in business organization, business systems, and business management techniques.
● Do not think that a C.P.A. can perform a credible IP valuation. As you can see from the above cited list of skill requirements, many of them are beyond the areas of training, experience, and competence of a C.P.A.
Keep in mind that this article only hits some of the high points of IP valuation since it is a very diverse and complex subject, reflective of the diverse and complex nature of IP assets themselves. If you require an IP valuation for any purpose, take it seriously and make sure that you hire someone that understands the nature of the IP assets to be valued.
ABOUT THE AUTHOR: Valuation Expert Witness Don Coker
Experienced banking, corporate finance, and valuation consultant often hired by the IRS and over 60 banks worldwide. Hired for a complex intangible asset valuation assignment by the International Accounting Standards Board Foundation in London. Expert witness in over 460 cases nationwide.
Copyright Don Coker
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.