Intellectual Property Valuation: How to calculate IP Valuation?
December 22, 2022
The term "intellectual property" (IP) refers to a class of property that encompasses intangible makings, such as distinctive identifiers for a company or its goods or services (e.g., logos, brand names). Patents, industrial designs, trademarks, copyright, IT infra, Apps, enterprise IT solutions, ITES, and trade secrets are examples of IP assets. IP assets are transferable, have an economic lifespan, and can be independently identified. The process of determining the fair market or arm's length value of IP assets is known as Intellectual Property valuation. Since intellectual property frequently represents a company's most valuable assets, appropriately valuing such properties is essential to determining the company's true worth.
An IP asset must have the following criteria in order to be quantifiable:
- It should provide its holder or user with quantifiable financial benefits.
- It should increase the value of all other assets to which it is related.
- It should have details of efforts/time/expenses for development
Prerequisites of Intellectual Property valuation:
When completing an Intellectual Property valuation, there are a number of crucial variables to identify and take into account. These consist of -
- Clear identification of the IP.
- Unambiguous title to the asset.
- Qualitative and quantitative characteristics of the IP.
- Earnings capacity and profitability relating to the IP.
- Market share supported by, or as a result of, the IP.
- Legal rights and restrictions, competition, barriers to entry, and risks associated with the IP.
- Product life cycles and positioning.
- Historical growth and prospects for the future.
- Investment or expenses which has been incurred to establish IP
How to calculate intellectual property valuation?
The value of the intellectual property may be determined using both qualitative and quantitative methods.
- Method 1: Market-based method –
- The market approach valuation technique looks at the value assigned to similar IP assets in transactions between independent parties to assess the worth of an IP asset.
- In this method, the comparison is made between the original price levied for transferring the rights with a similarly available asset.
- It quantitatively analyzes the market to obtain a fair value for the intellectual asset.
- Method 2: Cost-based method –
- The intellectual property's value is determined by calculating the cost incurred while creating it, including machinery, equipment, labour, legal protection, testing and trials, and overheads.
- Two different cost approaches can be considered in the determination of value: The recreation cost (cost associated with generating identical assets) and the cost of replacement (cost associated with the creation of assets having the same utility).
- It does not bring in the risks associated with the future cash flows of the IP.
- It is based on historical costs rather than future costs.
- Method 3: Income-based method –
- The value of the IP is calculated by forecasting the revenue that the asset will generate in the future.
- Works by discounting the expected future projections of cash flows or the income that is to be generated by the IP.
- It is the most scientific approach for intellectual property valuation; the other methods under this approach are the excess profit method and the royalty method.
Qualitative methods are employed when the intellectual property does not provide any monetary benefit to the IP owner and is used internally for research and development purposes.
- Method 1: Rating and Scoring – Scores are assigned considering multiple parameters which are regarded as non-quantifiable -- by analyzing the strategy, state of the technology, and value that the brand possesses and by measuring associated risks.
- Method 2: Value indicators – In this method, the data and information about IPs are collected and categorized using statistical tools. They are sometimes also used as a tool for internal comparison.
The need for Intellectual property valuation?
Intellectual properties are intangible assets formulated as patents, trademarks, designs, logos, etc. The only physical presence these assets have is in legally binding contracts. To protect the developer from any potential rights violation, it is imperative to first get the IP valued. IP asset valuation helps in the enforcement of rights associated with intellectual property.
- Future benefits - An IP asset's worth reflects the prospective financial gains that the IP owner or authorized user might derive from it in the future. The value may be derived by the sale or licensing of the IP to a third party, harnessing the IP by including it in the product, and certain other strategies such as increasing entry barriers or lessening the threat of substitutes.
Resurgent India Limited:
Resurgent India Ltd., a Category 1 Merchant Banker, is one of the leading companies that provide the finest intelligent property valuation services. We have helped numerous firms get accurate intellectual property values with the help of our talent pool of over 200 skilled professionals. Every pertinent facet of a firm is thoroughly analyzed and critically evaluated as part of our intellectual property valuation services. We also provide our services in mergers and acquisitions, private equity, structured finance, capital markets solutions, transaction advisory, government advisory, enterprise risk, stressed asset resolution, fintech solutions and a few other areas.