Intellectual property makes a business more attractive to potential investors. To optimise attractiveness and make the right decisions, it is essential to value IP.
For example, company valuation (for transactions, joint ventures, mergers and acquisitions etc). IP transactions (sale or licensing), financing of development plan, etc. are parts of various scenarios in which IP valuation is required. Valuing IP can also give a better idea of the overall value of a business, provide a tool to measure and manage assets, provide security and backing for lenders, or even provide taxation benefits (taxation deductions).
Before valuing, it is necessary to review the intangible assets that can be identified in your business. Those identifiable assets include patents, trademarks, brand names, copyright, designs, franchise, licenses, secret processes, databases, etc.
Once the assets have been identified, IP can be valued through various approaches:
- calculation of the costs incurred if a company were to develop a similar asset (cost based methods)
- comparison with similar IP transactions on the market (market based methods)
- valuation of the potential future benefits due to IP (income based methods)
- other common estimations (relief of royalties, excess profits or notional maximum royalties payable, capitalization of earnings, gross profit differential, premium sales price, brand strength, real options, etc.)
These methods each comprise advantages and disadvantages and need to be chosen according to the type of IP you have and the purpose for valuing it.
To undertake a valuation of your IP, it is recommended to contact a professional in this area which will have required expertise for identifying and valuing IP according to your accounting purposes.