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Introduction
The concept of valuation of intellectual property and other
intangible assets of a company is new as compared to other
concepts of intellectual property (IP) law. The value of an IP is
a monetary compensation that is expected to be received from
licensing of an IP or from sale or exchange of other intangible
assets. The intangible assets of a company includes goodwill,
trademark, technology, know how, trade secrets etc.
How can we say that IP has a value?
There are various circumstantial evidences to prove the same.
- money and time is spent on registering an IP
- IP protection involves legal and other costs
- A lot of amount is spent on advertising brands- IP contributes
to national economic accounts. What are the areas that require IP
valuation?
- purchase and sale of assets
- licensing
- corporate finance
- litigation
- transfer pricing
- financial reporting
How can IP be valued?
There are mainly three methods of valuation of IP.
- cost based method
- market based method
- economic based method
A brief of the valuation methods
Cost based valuation:
It can either be based on historic cost or on replacement cost. A
historic cost is the actual cost of creating an IP. This method is
not recommended as there is no correlation between expenditure and
subsequent value of asset. E.g. a product promoted at huge cost
does not appeal the customers. Replacement cost is the cost to
replace the asset. It is determined as to what will be the cost of
creating a new trademark or a patent. A major drawback of this
method is that it is not possible to determine an exact future
cost.
Market based valuation:
This method can be based on the market price comparability or on
comparable royal rate. Market price comparability- the value of an
IP is determined on the basis of price of comparable IP products.
Comparable royal rate: this requires construction of a business
plan around an IP. The resulting return is then compared to the
price of being owner of the asset. If the price is higher than the
return, it is recommended not to buy the asset.
Economic based valuation:
This is the most preferred method of valuation. This method
requires identification, separation and quantification of cash
flow or royalty fees to IP and then the capitalization of future
cash flow. Quantifying the future revenue stream can be done in
view of exploited or unexploited IP. In case of capitalization,
longer the period of money receipt, higher will be the risk. Risk
is described in terms of discount rate which in turn is based on
inflation rate, cost of capital and premium. A cash flow
projection is constructed and discounted to derive a net present
value. This estimated present value is the worth of the IP asset.
Limitation of IP valuation:
a major limitation is that it is based on estimates, assumptions
and judgments than on facts. Thus it lacks accuracy. Since IP
valuation is a new concept and is still at the stage of
development, more experience in this field will help making
accurate estimates. It adds to the value of the company and helps
the company make sound economic strategies.
Thus IP valuation is an important concept that helps a company to
get the price of which it is worth.
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The
author can be reached at: vidya.sunderam@legalserviceindia.com /
