How Is Intellectual Property Valued When Selling a Business?

Over the past few years, we have seen an uptick in intellectual property applications. Companies (even small businesses) have been on a patenting binge as they try to keep up with today’s technological advancement. But despite this, some businesses and companies are still unaware of the value of their IP assets, and some still pay for the maintenance fee of their low-value IP.

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Intellectual property like patents and trademarks plays an important role in your business. It adds value as well as credibility to your business. For instance, if you spent years curating and acquiring loyal customers for your brand, then your trademark would be much more valuable. Potential buyers would not need to build a name for themselves anymore because you already established it for them. That being the case, you need to reassess the value of your business and include intangible assets in the picture. Aside from measuring the value of your physical assets, you must also gauge the value of your IP assets.

On that note, we discussed some methods you can use for IP valuation as well as some factors to consider before you sell it.

Importance of IP valuation to your business

Determining the factors that affect the value of your IP is very important. By doing so, you can shift the value of your IP and build a better portfolio that you or your company can benefit from. That being the case, you will be able to assess which IP contributes to your business and which does not.

Knowing the value of your assets will also save you tons of money. There are lots of low-value IPs that are not worth keeping. It does not make sense to keep paying for maintenance and attorney’s fees if you are not reaping its benefits.

Business Valuation: Intellectual Properties: Patents, trademarks, and copyrights | Dale S Richards

All things considered, there are several factors and valuation methods that you can use to get the most out of your IP assets. It is only a matter of knowing when to sell your assets and what are the things you can do or avoid to improve the value of your assets.

Related: Understanding the Transfer of Intellectual Property

Cost Method

The cost method determines the value of your IP based on the amount you invested in creating and developing it. Some of the costs might include the amount invested in research and development, trial and testing, IP registration, and so on. Taking this into account, it is important that you at least have a basic understanding of how to file a patent, trademark, and/or other IP so that you can fully measure the cost you incur in the registration process. The main intention behind this valuation approach is that the purchaser would save tons of money and they no longer need to spend on these costs.

This valuation approach is best suited for IP products that have not reached the market yet. It is the type of products or inventions that have been granted patent or trademark by the United States Patent and Trademark Office (USPTO) but have yet generated revenues or have yet been commercially developed.

The drawback of this approach is that the potential profits of the product or invention are not accounted for. It is solely based on the cost incurred in developing the IP.

Income-based Approach

Also known as the economic benefits method, it is a valuation approach that places value to your IP assets by looking at the income it could generate in the future, whilst also taking into account the cost generating that income. To put it simply, this approach presents the value of the predicted income streams that stems from having the IP asset itself. It allows the purchaser to see the potential revenues as well as the risk and financial cost that an IP can bring to the business.

In comparison to the cost method, this approach uses potential scenarios in gauging the value of the IP rather than looking at the cost incurred by the owner of the IP. Some of the factors that can be taken into account when using the income-based method are the type of competition, the maturity of the IP, state of the country’s economy, and so on.

Relief from Royalty

To put it briefly, this approach assessed the value of your IP based on the royalties that purchasers have to pay if they did not own the IP.

Royalties are the payments you receive from another company/individual for allowing them to use your intellectual property. It applies to all types of IP, from trademarks, patents, to copyrights, and so on.

Market Approach

This is best suited for IPs that have already entered the market or have similar products that are already in the market. The market approach places value on the IP by looking at the product’s performance in the market as well as the transactions involving similar products.

As compared to the income-based approach, the market approach looks at the real-time performance and publicly available transactions related to the product. It gauges the value of the assets based on the consumer behavior.

Technology Factor Method

As we continuously make progress in today’s digital and technological age, intangible assets such as IP are becoming more common in the industry. In turn, sellers of IP are now turning to the technology factor method to gauge the value of their assets.

The technology factor method determines the asset’s value based on the technology’s contribution to a business. It also takes into account the strengths and weaknesses of the IP as well as the market, legal, and economic risk associated with it.

Other factors affecting IP valuation

Aside from the several valuation methods mentioned above, other several factors can also influence the value of your IP such as the freedom to operate, scope and validity of the IP, claims, geographic territories, tax, time of valuation, and so on. There are several patent attorneys serving New York, Seattle, California, and other states near you that you can consult with to have a better understanding of how these factors affect your assets.

Understanding how your assets are valued helps you make informed decisions and lets you better negotiate with a potential buyer of your business.

Published by ExitAdviser


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