Topics Covered in this article
The surplus of existing assets (cash, short-term deposits, accounts receivable, inventories, deferred expenditures, and so on) over current liabilities is referred to as working capital (trade accounts payable, current portion of long-term debt, income taxes, withholding taxes, accrued liabilities, etc.). Net current assets is another name for it.
Farm, machinery, and facilities, land and structures, office furniture and equipment, machines, automobiles, and other real property used by a company but not turned into cash in day-to-day operations are examples of fixed assets. Fixed assets have traditionally been thought of as a company’s “bricks and mortar,” and as the primary contributors to its wealth and value.
Intangible assets are a company’s non-physical collateral. Traditionally, they were thought to be a company’s ‘Goodwill,’ or the price paid by a company that exceeds the equal value of its identifiable net assets. ‘Goodwill’ encompassed a vast variety of intangible properties, including client satisfaction, a well-known brand name/strong credibility, staff caliber and morale, intellectual property rights, and so on.
IP assets are a kind of intangible asset that differs from other intangible assets in that they are generated by statute. As a result, intellectual property rights are constitutionally secured and can be executed. These may be defined individually, are transferable, and have a monetary value (in contrast to their legal life, which is generally longer than their economic life).
Patents, architectural inventions, trademarks, copyright, and trade secrets are examples of IP properties.
An intellectual property commodity may be described in terms of qualitative characteristics or criteria (such as that of novelty, originality).
An IP asset can be specified in terms of the financial gain associated with it.
Value of an IP
The right to remove entrants from a competition determines the worth of an intellectual property asset. The economic right is founded on exclusivity of access, that is, the freedom to regulate the use of the IP asset, while the legal right gives exclusivity or the right to exclude. To provide a quantifiable worth, an IP asset must: – have an observable economic advantage to its owner/user; and – increase the value of other properties with which it is connected.
Why do you need to value your intellectual property?
Licensing and Franchising
A thorough knowledge of the IP Assets allows for more informed negotiating and decision-making when it comes to the terms and conditions of licensing-in or licensing-out of IP, especially when it comes to deciding reasonable and rigorous royalty rates. Both the franchisor and the franchisee must have a clear knowledge of the importance of the trademark(s), trade secrets, and know-how and such IP properties when it comes to franchising.
Merger & Acquisition, Joint Venture or Strategic Alliance
The valuation of the target company’s IP properties is the primary justification for considering an M&A deal. IP valuation allows the parties to make rational decisions on the acceptable cost of capital or the financial leveraging approach to use. It also has a favorable impact on the valuation and share price of the resulting firm. The IP valuation approach is enunciated in the policy of world-class corporations such as the Volkswagen Group and the Tata Group to embrace products.
Investment in Research and Development (R&D)
Budgeting and resource allocation decisions benefit from IP valuation. For example, if a company invests heavily in internal R&D but loses ground to rivals due to delayed or late product introductions, it may need to reconsider its R&D policy and processes. IP assessment also serves as strategic advice for new product growth, brand extensions, line extensions, overseas litigation and trial charges, and so on.
The accounting community has began to treat IP assets differently in financial statements as the increasing share of IP assets in overall market capital of companies has been recognized. The International Accounting Standards Board (IASB) now acknowledges acquired and recognizable intangible assets (i.e., IP assets) and mandates that all acquired IP assets be recorded as assets on the balance sheet of the company that acquired the IP assets, apart from goodwill. When a brand is purchased, for example, IP valuation is performed on the original valuation as well as annual failure checks on the derived values to be used in the balance sheet.
In order to figure out how to reduce a company’s tax bill, its properties, including its intellectual property, must be valued. IP assets have various tax preparation tools in both third-party deals and internal policies such as cross-border share pricing and centralizing IP asset holdings in IP holding firms. The Internal Revenue Service or other taxing bodies would like to hear as much as possible about the basis behind any value determination used when allocating parts of a company’s sales price.
Insurance of IP assets
With a number of major insurers in developed countries developing products tied to the capital value of IP properties, especially trademarks/brands, a completely new market for IP asset insurance is emerging. When it comes to insurance, valuation is extremely important.
How can you figure out how much your intellectual property is worth?
The evaluation of intellectual property (IP) can be a difficult task. The best approach for valuing IP properties is determined by the premise of meaning to be extracted from the result, the assets to be valued, and the segment for which the valuation is planned.
• It must be identifiable in its own right (subject to specific identification and with a recognizable description)
• There should be concrete proof of the asset’s existence (e.g. a contract, a license, a registration document, record in financial statements, etc.)
• It should have been produced at a certain time and place.
• That should be enforceable and transferable in the legal sense.
• The revenue source should be distinct and distinct from that of other company properties.
• It should be able to be sold without the help of any company properties.
• It should be able to be destroyed or terminated at a certain point in time.
The cost approach is focused on estimating the cost of producing a comparable (or exact) IP asset either internally or externally in order to determine the worth of an IP asset. It aims to calculate the worth of an IP asset at a given point in time by aggregating the direct and opportunity costs associated with its growth, as well as taking into account the asset’s obsolescence.
Physical decay, as well as practical, technical, and economic obsolescence, both refer to IP; however, physical deterioration does not apply to IP since it is intangible. The importance of IP is affected by functional, technical, and economic obsolescence.
It happens because the IP user must pay higher operating costs to use the IP rather than new, state-of-the-art alternatives.
It happens as technical powers devalue the IP. Patents on a next-generation electronic floppy disc drive, for example, are likely to be useless since better technical alternatives are already available.
It happens where the largest and strongest use of IP is unable to have an acceptable return on investment. This is easy to do in IP because IP is generally special and could have little use outside of a specific application.
The expense approach is typically the least used method since it is only found appropriate as a complement to the income method in most situations (if the valuation is not for bookkeeping purposes). When the subject IP is currently not receiving any revenue, this approach is typically used.
-When the income stream or other economic benefits associated with the asset being valued cannot be reasonably and/or accurately quantified
– there is no economic activity to review, such as early-stage technology that is not yet producing revenue
– there is no direct cash flow being generated by the asset being valued, the cost method is a useful method.
– calculating a floor or minimum value/price for an IP asset; however, the floor might be misleading if the expense contains items that do not add value to the IP asset;
– determining a maximum price for purchasing an IP asset as there are several candidates for replacement.
The consumer approach compares the average price paid for a particular IP asset under similar situations.
To use this approach to value something, you’ll need:
– A thriving industry (price transparency, at arm’s length)
– An exchange of an equivalent IP asset, or a collection of IP assets that are equal or related.
– Factors to account for disparities in IP assets where they are not perfectly equal.
The more specifics on the essence and scope of the rights transferred, including the specific terms and conditions, as well as the circumstances of the agreement (e.g., cross-licensing, license negotiated in settlement of litigation), the more precise the appraisal would be.
A valuation based on the income approach is much less likely to represent consumer expectations and moods than this method.
– Use of market
– Can be very helpful if exact comparables are available (e.g., licensing agreements relating to the same technology)
– Often used to determine “ballpark” values, particularly for royalty rates
– Favored by tax authorities for deals with associates
– Best for deriving inputs for the Income system
The income equation assigns a value to an IP asset based on the amount of economic income it is intended to produce, calculated for its current value. This is the most popular approach for valuing intellectual property.
How to determine economic income
a. Estimate the IP asset’s sales flow (or cost savings) over the asset’s remaining usable life (RUL).
b. Exclude expenses immediately related to the IP asset from those revenues/savings. Costs include labor and supplies, as well as the necessary capital expenditure and any economic rentals or capital charges.
c. Use the discount rate or the capitalization rate to discount the sum of profits to a present-day value, taking into account the chance.
The DCF approach is easier to use for IP assets whose cash flows are actually positive, can be calculated with some confidence for future times, and provide a risk proxy that can be used to calculate discount rates. It accurately reflects the valuation of IP properties with relatively steady or consistent cash flows. It forces you to consider the firm’s fundamental features and to comprehend its operations. In the very least, it forces you to confront the judgments you’re making when you pay a certain amount for an asset.
Management of Intellectual Property
Intellectual property, like many other company properties, is not “set it and forget it”; it is most valuable when it is checked on a daily basis. Developing a daily cadence for reviewing intellectual property results, procedures, and expenditure will help the company get the most out of its money. Examining how much the company spends on intellectual property administration, for example, will help you cut down on wasteful legal expenses. Similarly, process reports will assist the company in maximizing resources and streamlining the process from concept to commercialization.
To enable the company to make smarter and quicker decisions. Intellectual property metrics have a comprehensive view of the process. Unfortunately, companies that emphasize other roles over intellectual property management do not always collect this info. Without a thorough examination of this evidence, the company runs the risk of making rash decisions. There are few examples of data points:
• Number of innovations produced
• Time taken by the invention disclosure process
• Invention leaks that result in patent applications
• Ratio of approved patents to patent applications
• Ratio of prosecution costs to issued patents
Automation simplifies intellectual property management while further lowering the risk of human error. It’s impossible for stakeholders to cooperate for a better final result as processes are performed by email and paper, for example. Furthermore, it is very easy to lose track of data. System automation gives the company greater leverage over the specifics and allows the intellectual property team to concentrate on project planning and implementation.
Take a Belt and Suspenders Approach
Many of your artistic endeavors are worthy of being safeguarded. However, there isn’t really a choice between the two. Applying various modes of defense is always possible and prudent. Patentable technologies, for example, should be kept as trade secrets before the patents are released, barring such exceptions or additional security provisions such as nondisclosure arrangements. To cover published specifications such as data sheets, product brochures, source code, and so on, copyrights should be considered. Trademarks should overlap otherwise covered goods and services, and each trademark should be assigned multiple classification codes based on the type of protection desired.
Implement IP Management Software
Your company will keep track of all of this and more through intellectual property management tools. These programmes give you more flexibility by allowing you to see the whole IP inventory and its current state, as well as perform analysis, monitoring, and reminders. Your company would see significant time and expense benefits, as well as increased sales opportunities, if one of these solutions is implemented.
The use of market power
The willingness of a business to raise the price of a product or service above the competitive level is known as market control. The policy centered around the firm’s goals of obtaining exclusive privileges for its inventions and using certain protections to block competition and/or achieve freedom of expression. It enables you to achieve market dominance and a large profit margin. In industries with a strict appropriation policy, such as the pharmaceutical industry, this approach is particularly justified.
What are the risks of pursuing this course of action? hangs in the essence of the sector’s rivalry, growing rivals’ incentive to bypass IP privileges and shrinking the demand for complementary goods to those covered. Another downside to using the market dominance approach is that the network effect is weaker. Using various technologies could result in a lack of network impact on the part of the organization, or even its creation on the part of the competition.
When an asset is worth more to the buyer than it is to the owner, it is a smart idea to sell it. In the case of patents, this could be the case if the patent applicant lacks adequate capital for the manufacture and sale of the protected products.
Licensing and cross-licensing
Firms are also hesitant to license out patents that they are using to gain a competitive advantage. However, in order to commercialize their technology, they could license the patent exclusively to a partner with the necessary complementary properties. External patent exploitation in the form of a license, on the other hand, can provide an additional revenue source for the innovating business. Licensing is particularly advantageous where a corporation lacks the financial means to protect its intellectual property rights. Low licensing fees can also deter competitors from producing competing technologies.
Implications for managers: Many businesses rely on the tried-and-true method of using market leverage, while other approaches may generate more revenue from this type of intellectual property. It is insufficient to align patent protection policies with the company’s general approach. Since there is no such thing as a “one-size-fits-all” patent management approach, it should be tailored to the industry, the firm’s general strategy and business plan, demands, organizational requirements and capacities, competitive and institutional climate, and the company’s scale.
Although using market control is still the most prevalent approach, companies should pay more attention to alternate tactics such as (but not limited to) leveraging.