The most common types of Intellectual Property, Intellectual Capital, and Intangible Assets that need valuation are:
- Patents – Single patents or groups of patents that refer to a common technology.
- Trademarks – This includes recognizable logos, brand names, etc.
- Copyrighted assets such as written works, art works, music works, etc.
- Favorable factors such as favorable supplier contracts that offer an advantage over what a competitor would have to pay for the same materials.
- Customer relationship assets such as a core customer base, etc.
- Customer-centered assets such as customer lists, existing customer orders, etc.
- Workforce-related assets such as a trained workforce, loan origination network, established stockbroker network, established insurance agent network, etc.
- Real Estate related assets such as leaseholds, air rights, water rights, etc.
- Goodwill – The net present value of the excess earnings of a company (due to its superior performance) when compared to the earnings of other similar companies.
There are many other assets that can be categorized as Intellectual Property (“IP”), Intellectual Capital, Intangible Assets, or other similar terms. In the interest of brevity, I will refer to all of these categories as simply “IP.”
There are four key issues that need to be kept in mind when valuing, or reviewing a valuation of, IP assets:
- Generally, the best reflection of the value of an IP asset is the Net Present Value of the reasonable future cash flows that will be produced by the asset. This means that particular attention must be paid to the future life of the asset.
- Quite often, the most accurate methodology for valuing IP assets is to value them as if they were a stand-alone business. For example, a group of patents that all relate to a better copying machine would most likely be marketed as a bundle since some of the patents may rely on other patents within the group of patents.
- In some cases, the value of an IP asset relates to an advantage that the asset provides over a competitor’s similar asset. For example, a favorable long-term supplier contract should be valued in terms of the net present value of the advantage in pricing produced by the contract over its life.
- In some other cases, the value of an IP asset relates to the cost that was expended to develop the asset compared to what a competitor would have to spend to develop a similar asset. For example, the value of a trained workforce should be roughly equivalent to what it would take to reproduce a similar trained workforce.
There are many other complicating factors that are present in the valuation of IP assets, just to mention a few:
- Is the asset to be sold or licensed for some finite period?
- If the asset is to be licensed, will there be a single licensee or multiple licensees?
- If the asset is a patent, how many years has the patent been in use and how many years of
patent protection remain?
- If a patent application has been filed but a patent has not been granted yet, there is a risk that the patent application for the subject technology may be worthless.
Keep in mind that a unique group of skills will be required in order for a valuation consultant to produce a credible Intellectual Property valuation. Some of those skills include:
- Knowledge of the IP creation, ownership, and transfer process.
- Knowledgeable in many types of valuation methodologies.
- Knowledgeable in the principles of financial mathematics.
- Knowledgeable in corporate financing techniques.
- Knowledgeable in how to determine and analyze market factors.
- Knowledgeable in business organization, business systems, and business management techniques.
- Do not think that a C.P.A. can perform a credible IP valuation. As you can see from the above cited list of skill requirements, many of them are beyond the areas of training, experience, and competence of a C.P.A.
Keep in mind that this article only hits some of the high points of IP valuation since it is a very diverse and complex subject, reflective of the diverse and complex nature of IP assets themselves. If you require an IP valuation for any purpose, take it seriously and make sure that you hire someone that understands the nature of the IP assets to be valued
About the Author
The author of this article is an experienced financial professional with extensive experience in IP valuation matters, and is available to discuss your IP valuation needs.
- The author of this article has extensive experience in the valuation of IP assets and in corporate finance.
- He has been called on by the Internal Revenue Service seven times to value 28 IP assets with a combined value of over $21.55 billion.
- His background in banking and finance includes employment and extensive training with Citicorp and Ford Motor Credit Co. and entities that are now Citigroup, Bank of America, JPMorgan Chase, Regions Financial, and Guaranty Bank.
- He has personal experience with the creation, filing, and transfer of IP assets.
- He is widely published and quoted in the media.
- He has been engaged as an expert witness consultant for over 400 cases nationwide by attorneys for plaintiffs and defendants since 1989, and has testified over 100 times.
- His clients have included 8 of the top 10 banks in the country, 12 of the top 45 banks in the world, and 33 of the top 250 law firms in the country.
- He has extensive experience as a consultant to various arms of the United States government as well as numerous foreign governments.
- Call or e-mail to discuss your IP valuation needs.
Written by: Banking Management Economic Valuation Expert Witness No. 74
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