IP Valuation

By 2019, it was estimated that 84% of the value of the S&P 500 was constituted by intangible assets, including registered IP rights and goodwill and reputation, with only 16% represented by tangible assets such as plant and machinery or real estate. As recently as 1975, the split had been: 17% intangible assets to 83% tangible assets.

The trend towards intangible assets applies equally to smaller businesses too. While people tend still to think of IP in legal terms, in a modern business, intangible assets are no longer just a protective shield against competitors. They are, more often than not, the major asset of a business in their own right; this tends to be true even if you do not consider your business particularly innovative or technologically driven.

IP valuation is, in essence, an educated, independent, and most important of all, justifiable estimation of the value of these intangible assets at a particular point in time, and that will hold up to scrutiny by interested third parties.

The legal efficacy of IP is not always a determinant of (or even correlated with) its commercial value as an asset. It is often the case that an intangible asset that might be very difficult to protect or enforce through the intellectual property legal framework – say, for instance, knowhow or a trade secret – can still be a source of enormous asset value for a business.

In conducting an IP valuation, all quantitative assumptions are informed by detailed qualitative analysis of the IP itself, its useful life, and the competitive and macro-economic conditions in which the particular intangible assets exist.

In the information age, the necessity for valuation of IP in general is self-evident: it is a major asset, and you should know what it is worth.

However, there are also many, ever-evolving specific reasons why you might need or want to have intangible assets independently valued. Some of these (not a closed list by any stretch) include:

• Purchase price allocation - In the context of a sale of business, it is often useful for taxation purposes, particularly for the buyer, to know what proportion of the purchase price relates to intellectual property, and to define in specific terms what that intellectual property is (or is not).
• Offshore transactions or restructuring - In cross-border or related-party transactions, intangible assets should be transferred or licensed, and accounted for, under arm’s length, market-related conditions, often necessitating an independent valuation of the intangible assets involved.
• Venture Capital or Angel Investment - Independent valuation of early stage technologies for purposes of allocating shares to investors, or as a marketing tool to attract start-up funding.
• Definition of nature and value of intangible assets (due diligence) as part of a potential acquisition of a business.
• IAS (International Accounting Standards) / IFRS (International Financial Reporting Standards) compliance.
• ISO (International Organization for Standardization) brand valuation standard compliance.
• IP ring-fencing (to insulate IP from unrelated business risk, protection in the event of insolvency).
• ROI (return on investment) calculations on marketing and IP-protection spend (to be included in annual reports to shareholders or to bolster share price).
• Negotiation/substantiation of reasonable (and justifiable) royalty rates in licensing/franchising transactions.
• Use of IP in debt-financing / gearing / hypothecation / securitisation transactions.
• Separating or spinning-off of robust intangible assets from underlying, failed enterprises in the context of administration or insolvency.