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IMPORTANCE OF IP VALUATION: UNLOCKING THE TRUE VALUE OF INTELLECTUAL PROPERTY

SURANA & SURANA > அறிவுசார் சொத்து உரிமைகள்  > IMPORTANCE OF IP VALUATION: UNLOCKING THE TRUE VALUE OF INTELLECTUAL PROPERTY

IMPORTANCE OF IP VALUATION: UNLOCKING THE TRUE VALUE OF INTELLECTUAL PROPERTY

IMPORTANCE OF IP VALUATION

Nihaarika Prudhvi, Trainee – Intellectual Property Rights Practice

INTRODUCTION:

In today’s knowledge-driven economy intellectual property (IP) has become an asset for businesses across various industries. IP assets such as patents, trademarks, copyrights, trade secrets and designs can represent a significant portion of a company’s worth. However accurately assessing the value of these assets can be a complex task. This is where IP valuation comes into play. IP valuation enables businesses to understand and quantify the value of their intangible assets aiding in strategic decision-making transactions and legal matters. So, basically this article helps the readers to gain a little knowledge about IP valuation.

UNDERSTANDING IP VALUATION:

IP valuation is the process of assessing the financial worth of intangible assets held by an individual or an organization. The valuation can be conducted for various purposes including mergers and acquisitions licensing agreements investment decisions tax planning financial reporting litigation and dispute resolution. By determining the economic value of IP assets companies can make informed decisions about their utilization, monetization protection and management.

METHODS OF IP VALUATION:

Several valuation methods are employed to estimate the value of intellectual property assets. The choice of method depends on the nature of the IP, the purpose of valuation industry standards and other relevant factors.

Here are some commonly utilized approach methods: –

1. COST-BASED APPROACH METHOD:

What exactly is it?

The Cost-based approach method is based on the cost of its creation and development when determining the IP value. This method focuses on determining the costs of creating or acquiring similar IP assets.

How does it work?

  • Cost-based methods involve calculating the cost of creating and developing an intellectual property asset, including machinery, equipment, labor, enforcement, testing and experimentation, and overhead.
  • These are either the historical costs of creating and developing the IP analyzed or the costs that the organization would incur if it created and developed similar IP assets.
  • Costs are apportioned to value because if the organization were to buy the IP rights from the IP owner, those costs would not be raised (because the IP right has already been developed).

Examples:

  • Patent valuations
  • Portfolio valuations
  • Mergers and acquisitions
  • Seeking investment
  • Licensing IP

2. MARKET-BASED APPROACH METHOD:

What exactly is it?

The market approach valuation method determines the value of an IP asset by examining the value assigned to comparable IP assets in unrelated party transactions.

How does it work?

  • In this approach the value of IP is determined by analyzing comparable market transactions.
  •  It involves researching the sales of similar IP assets in the industry and making adjustments for differences in terms of technology, geographic scope, market position and other relevant factors.
  • This method relies on market trends, demand and pricing behavior to estimate the value of the IP.

Examples:

  • Licensing agreements – determining fair royalty rates for licensing intellectual property.
  • Corporate disputes – proving the worth of a company during a dispute.
  • Tax defenses entail presenting users’ business valuation to the IRS.
  • Business purchases and sales – entail determining a reasonable price for the purchase or sale of a business.

3. INCOME-BASED APPROACH METHOD:

What exactly is it?

Income-based valuation methods are based on the value of the income that the IP is expected to generate in the future and the financial benefits that it will bring to the business during its economic life.

How does it work?

Income methods involve estimating the potential future income, risks, and costs of the IP. User must use them to calculate the net present value (NPV) of the IP, and that number is either positive or negative.

Examples:

  • Sale/purchase of a company
  • Licensing of IP Assets

BENEFITS AND APPLICATIONS OF IP VALUATION:

  1. Strategic Decision-Making: IP valuation provides insights into the potential value and competitive advantage offered by IP assets enabling businesses to make informed decisions about investment commercialization and expansion strategies.
  2. Transactional Purposes: IP valuation plays a crucial role in mergers and acquisitions joint ventures licensing agreements and IP transfers. It helps parties negotiate fair deals, determine appropriate pricing and assess the risks and benefits involved.
  3. Financial Reporting: Valuing IP assets accurately is essential for financial reporting purposes to meet regulatory requirements including an accurate representation of a company’s worth disclosure of intangible assets and compliance with accounting standards.
  4. Tax Planning: Proper IP valuation can assist in optimizing tax strategies by identifying areas where tax benefits or incentives can be applied based on the value of the IP assets held by the company.
  5. Litigation and Dispute Resolution: IP valuation is often crucial in legal proceedings particularly in cases of IP infringement, breach of contract or disputes related to royalties. It provides objective evidence of the economic value of the IP asset supporting legal arguments and facilitating negotiations.

Conclusion:

IP valuation is a critical process that enables businesses to understand the economic worth and potential of their intangible assets. From aiding strategic decision-making to supporting legal proceedings IP valuation helps companies unlock the true value of their IP and enhances their competitiveness in a rapidly evolving global marketplace. By leveraging an accurate assessment of IP assets businesses can maximize their valuation, mitigate risks and capitalize on the potential of their intellectual property.

Bibliography:

  1. Referred ebooks – Intellectual Property Valuation and Royalty Determination” by Tim Heberden, Paul Tahalele, and Bob Breeze – This book provides a comprehensive overview of IP valuation methods and practices, including case studies and real-life examples.
  2. Referred website: International Valuation Standards Council (IVSC) – The IVSC sets global standards for valuation professionals. They provide guidance on various valuation topics, including IP valuation. Their website offers access to standards, publications, and educational materials. Visit: www.ivsc.org.
  3. Referred URL: https://indico.cern.ch/event/182857/contributions/1450763/attachments/248410/347475/IP_Valuation_CERN.pdf.

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