In this guide, we explain how to properly value your intellectual property portfolio. We will outline when you might need a professional valuation, the different methods available, and key considerations for choosing the right expert.
If you are reading this guide because you need immediate help valuing your intellectual property portfolio, our intellectual property lawyers can help, we will work with your accountant or valuer to identify the rights within the business and support them with the valuation process.
Contents:
- What are the benefits of valuing your intellectual property portfolio?
- When would you look for a valuation of your intellectual property portfolio?
- Who should conduct the valuation of your intellectual property?
- Should my lawyer be involved in the valuation process?
- What are the different methods of valuing intellectual property?
- What are the challenges in accurately valuing intellectual property?
- How can you protect the value of your intellectual property?
- Summary
What are the benefits of valuing your intellectual property portfolio?
The value of intellectual property rights can rise and fall in value depending on a number of factors such as market conditions, competitors, business performance, emerging technologies, industry changes, legal disputes, customer demand and changes to licenses and other trading arrangements.
If your business relies on its intellectual property as a major source of revenue, you will want to conduct regular portfolio reviews and valuations. This will allow you to manage your intellectual property rights effectively and take action where they are not being exploited fully or require additional protection.
When would you look for a valuation of your intellectual property portfolio?
A business that has an intellectual property portfolio should conduct a full review and valuation every 1-2 years. Events may occur during the course of business that will require a valuation. Examples of when a valuation would be needed include:
- Licensing or franchising agreements;
- Selling or assigning intellectual property rights;
- Tax planning, reporting or claiming;
- Fundraising and attracting investors;
- Mergers and acquisitions;
- Insolvency, disputes, or litigation;
- Launching new products or expanding abroad;
- Making strategic business decisions.
You may require an understanding of the value of the intellectual property in your business in order to make a strategic business decision or to claim an important business relief. You may also need to assess how your assets have been affected by a change in the market or how they have been impacted by recent regulatory or legal reforms.
Who should conduct the valuation of your intellectual property?
There are various different experts that can help you value intellectual property rights. These include intellectual property valuation specialists, accountants or firms recognised by the Royal Institution of Chartered Surveyors (RICS). The choice of expert really depends on why you are valuing your intellectual property and the type of intellectual property rights involved. Different professionals bring different expertise and methodologies.
You should always check the credentials of the specialist that you intend to use. For example, are they members of any relevant certifying bodies or licensing bodies such as RICS (Royal Institution of Chartered Surveyors), ICAEW (Institute of Chartered Accountants) and do they hold any professional accreditations, for example the CFA designation (Chartered Financial Analyst), ACA (Associate Chartered Accountant) or FCA (Fellow Chartered Accountant) designations. Accredited members often have advanced training and are regulated meaning that their work will be subject to scrutiny and follow specific standards.
If you require the valuation for a specific purpose, then you may need to engage an expert that is experienced in providing valuations for that particular purpose or scenario and whose qualifications are acceptable to the intended recipient.
For example, for disputes and court cases, engaging an Intellectual property lawyer or patent attorney alongside a valuation specialist is recommended, to provide support for the valuation from a legal perspective. For valuations that are necessary for financial and tax or regulatory purposes, a chartered accountant or firm regulated by RICS may be preferable so that the valuation is presented in a way that is acceptable to HMRC and uses recognised financial models and auditing standards. For complex intellectual property portfolios and valuations that require industry expertise, engaging an independent intellectual property valuation consultant with experience or specialism in that sector may be useful and can provide in-depth, detailed reports for a variety of uses.
Since a valuation is often required for external purposes, it is important to ensure that it is obtained from an independent and unbiased source so that the result is defensible, and third parties will be more likely to trust it. Conflict checks should be conducted if there is any doubt as to whether the valuer has any ties to one of the parties or a personal interest in the outcome.
Should my lawyer be involved in the valuation process?
Involving your intellectual property lawyer is often recommended since they will be able to identify intellectual property rights that belong to you and can analyse their strength and enforceability. This is necessary to define the scope of the valuation and to provide evidence to support ownership of the assets that are included.
What are the different methods of valuing intellectual property?
Since intellectual property differs in nature and scope and involve both financial and legal considerations, there are several ways in which they can be valued. The approach can differ depending on the type of asset and the purpose of the valuation.
Cost-based methods
These methods assess how much it would cost to create, develop or replace the intellectual property in question. Factors that are taken into account include research and development expenditure, design cost, advertising and marketing expenditure, costs incurred in making prototypes, labour and materials costs, overheads and registration and legal costs.
- The historical cost method looks at the actual costs that were involved in the past, taken from business and accounting records and invoices;
- The replacement cost method estimates how much it would cost at present to recreate the assets to the same standard; and
- The reproduction cost method estimates the cost to make an exact copy of the assets.
These bases are useful where there is little or no goodwill in the assets or it is difficult to find like for like comparisons in the marketplace. They do not take account of any future earning potential or value in the intellectual property over and above its pure creation cost. For businesses with more established intellectual property rights or a strong position in the market, a different valuation method is likely to give a more useful and nuanced result.
Market-based approach
This method looks at the recent track record of the product and its position in the marketplace. Various benchmarks can be used such as the sale or licensing of similar products in the market. It is not always easy to find comparable information as many sales and licences of intellectual property are dealt with confidentially so that the data cannot be obtained. For patents, their value depends on their novelty so comparable data is again difficult to come by.
A market-based valuation approach is most useful when negotiating licenses and royalties, where an industry range or average value can be used as a basis for the negotiations.
The income or economic benefit methods
These methods involve looking forward to future revenue generated by the intellectual property rights in question. The Relief-from-royalty method calculates, by assessing royalty benchmarks, what amount might be saved on royalties by owning the intellectual property rather than having to licence them. The Excess earnings method attributes a proportion of profits to the intellectual property rights after having accounted for returns to other assets. The discounted cash flow method assesses the ‘Net present value’ of the intellectual property by offsetting potential future income generated by the intellectual property rights against the financial costs that are likely to be involved.
These methods are flexible and capture the future earning capacity of the intellectual property but can be difficult to estimate and require detailed financial modelling.
What are the challenges in accurately valuing intellectual property?
With intellectual property being intangible and/or novel, it is often difficult to find a comparable brand or invention that can be used as a benchmark for valuation purposes. In such cases you may need to adopt a cost-based approach or find an expert with particular expertise in modelling market scenarios and revenue streams.
The value of your intellectual property can be affected by legal and commercial risks such as infringement, expiration of rights, changes in technology, competitor activity and market conditions. Many of these aspects are constantly changing and cannot be easily predicted. There are steps that you can take to minimize the risk of devaluation such as ensuring that your rights remain registered and enforceable, maintaining a competitive advantage through innovation and effective intellectual property management and by continuous monitoring and enforcement.
How can you protect the value of your intellectual property?
Active and regular portfolio management is required if you want to make sure that your intellectual property rights are protected at all times. Your intellectual property lawyer should conduct regular portfolio reviews and inform you of any rights that are due to expire or that have maintenance obligations to fulfil in order to stay registered. An intellectual property audit can also help identify any gaps in protection and where additional registrations are advised to strengthen core assets. For rights that are not registrable, you will need to keep current, accurate records of when such rights were created and by whom and when and how they have been used by the business. For example, keeping a trade secrets register can help to demonstrate that the secrets have real commercial value and that reasonable steps have been taken to protect them, which is necessary if they are to form the basis of a patent application. A copyright register is important to demonstrate proof of creation and ownership of copyright protected works and should contain time and date-stamped versions of the works and details of the author, the date of creation/modification and when and where it has been published.
You should also undertake regular reviews of any contracts and licenses to check that they contain adequate provisions to identify and protect your business’s intellectual property rights. Extra care should be taken to ensure that trade secrets and confidential information are not disclosed, either deliberately or involuntarily and Non-Disclosure Agreements should be entered into with third parties and employees or contactors. Your employment and contractor agreements should contain clauses to assign all intellectual property rights generated in the course of business to the business itself and you will also need up-to-date policies and procedures in place to ensure that information and data is protected and trade marks and branding is correctly used both internally and externally. License agreements are another example of contracts that require robust intellectual property clauses in order to clearly define ownership of any rights existing or to be created, control and specify the scope of their use and set out who is responsible for taking infringement action.
The value of your intellectual property rights is also dependent on whether those rights are being infringed by third parties and whether you are taking positive action against any unauthorised use. Various tools are available to monitor competitors, registries and the marketplace to identify and flag any suspicious activity, infringing or counterfeit products, copied or infringing content or confusingly similar brands. Intellectual property lawyers can set up trade mark monitoring services to identify new similar trade mark applications in your key territories and advise you on any recommended action. Monitoring of domain names, online marketplaces, app stores, competitor websites, customer review pages and social media can often be set up automatically and scanning software and tools that conduct reverse image searches can also be employed. Employees and customers should also be educated into identifying and reporting potential infringements. Usually employing a combination of internal checks and procedures, automated tools and software and external legal assistance is advised to keep on top of monitoring and be able to respond quickly and effectively when a breach or potential breach is identified.
Intellectual property insurance is often overlooked when considering key protections for a business’s assets. As well as helping to cover the cost of disputes and legal action, insurance can protect you again the loss of value in your intellectual property rights if they become unenforceable or are invalidated or diluted. If your intellectual property is a core asset or is somewhat vulnerable in nature, this may be well worth the cost. There are different types of insurance and levels of coverage, and these will need to be weighed up against the cost of the premium. You can ask a lawyer or insurance expert to provide a risk assessment of your intellectual property portfolio and then consider the cost/benefit implications of the various insurance options.
Summary
Protecting your intellectual property requires continual, proactive intervention and a combination of legal and practical steps. Valuing your intellectual property can help you to identify how useful they are to your business and help you make critical and strategic business decisions, guide investment decisions and prioritise where to allocate resources for maximum commercial impact. A comprehensive, professional approach to intellectual property management depends on both external advisors such as intellectual property lawyers and expert valuers as well as internal policies, procedures and resources, to ensure that your intellectual property is properly protected, accurately valued and effectively leveraged for maximum growth and investment.
