The Growing Importance of Intellectual Property Valuations

Intellectual property (IP) valuations have garnered more attention in recent years as the knowledge-based economy has taken hold. According to a study by Ocean Tomo, 90% of the market capital of the S&P 500 Index is driven by intangible assets, up from 32% in 1985. The ever-growing importance of IP to businesses places a high premium on the process used to tap into the full value of those intangible assets.

What Is Intellectual Property?

Intellectual property is a broad term used to describe a set of intangible assets legally protected by a company or person who is responsible for the creation of the work or invention. This protection restricts use of the IP by other parties and grants exclusive rights to the creator.

In our current digital era, intangible assets — such as human capital, R&D, and software — are just as important as physical property, like machinery and equipment. By acquiring protective rights such as patents and trademarks, IP owners enhance their competitive differentiation. In turn, the IP holds the potential to increase the company’s overall value and market share.

So, whether your business is looking for new investors, determining royalty rates, or considering a transaction, there are many advantages to securing your IP rights.

Types of Protection for Intellectual Property Assets

Patents, trademarks, copyrights, and trade secrets are four types of IP asset protections. Each protection works differently, and in some situations, more than one type can apply. 

Patents

A patent grants exclusive rights to the creator of a product or process that offers a new way of doing something. It also prevents others from making, using, or selling the product or process for 20 years. The two most common patents are utility patents (how the IP works) and design patents (how the IP looks).

Trademarks

A trademark is used to protect the various ways consumers recognize a company in the marketplace, such as a word, slogan, logo, or design — or even a color, smell, or sound. Trademarks are used to help differentiate a business from its competitors.

Many ask whether domain names can be protected by trademark. In short, the entire domain name, including the extension, cannot be trademarked; however, if another business is using a trademarked name in their domain with the intention of driving consumers to their site, a business may enforce trademark protection.

Copyrights

Copyrights protect the literary or artistic work of an author. For example, books, films, music, ads, paintings, blueprints, databases, and computer programs can be copyrighted. Under current law, published works are copyright-protected for 95 years after publication. However, copyright law may change — as it has in the past as a result of Disney’s plea to protect the rights of the Mickey Mouse character.

Trade Secrets

Trade secrets are just that — secret. Unlike the content protected by a patent, trademark, or copyright, these IP assets are not public knowledge, which leads some to argue that they are the most valuable types of IP.

The Importance of Valuing Intellectual Property

As IP’s value grows, businesses need to understand its worth. IP valuation can help a company uncover the true value of the business as a whole.

There are many reasons why companies should prioritize IP valuations in their business strategy. Some are easy to see: competitive advantage, licensing opportunities, and other chances for IP monetization.

Other advantages may be less obvious. For example, an IP valuation might allow its owner to:

• Prepare for a purchase, sale, or bankruptcy.  
• Leverage its IP to raise capital.
• Become or remain compliant with regulations.

Applying Valuation Methods to Intellectual Property

While we’d like to think that all property — tangible and intangible — is created equal, many companies find it difficult to value and protect their intangible assets. Currently, there is no straightforward approach or standard methodology for valuing intangible assets; however, a few different valuation methods can be used depending on the type of IP.

There are three main valuation methodologies: cost-based, income-based, and market-based.

The cost-based method considers the various costs (such as R&D, labor costs, and equipment) incurred to develop the IP. One downfall of this method is that it does not consider future revenue potential, which could undervalue the potential success of the IP in the marketplace. As a result, the method is often used to establish a floor value against which other methods are compared. It can also take on more weight in valuations of assets where the market has yet to be established, such as early-stage technology.

The income-based method aims to calculate the future revenue that a company’s IP could generate. This method considers market factors, competition, the state of the economy, and any other risk factors that could affect the IP in the future.

The market-based method is purely performance driven. This approach considers consumer behavior, supply and demand for similar products or services, and how the asset compares to others on the market. Oftentimes, comparative data may not be publicly available, which could make this valuation method challenging. 

What Should You Do Next?

As the importance of IP grows in the current knowledge-powered economy, consider taking steps to protect your IP and develop a strategy to stay innovative and competitive in your market. Reach out to your CRI advisor to discuss how an IP valuation can help you develop a more complete picture of your business’s value.