Intellectual property valuation

From: Canadian Intellectual Property Office

Intellectual property (IP) valuation is the process of assessing the monetary value of your IP assets. This can help you in strategic decision-making and also become a useful resource during negotiations. This page provides an overview of typical situations when a valuation is useful, the different valuation methods, and particular considerations related to the type of IP rights that are being valued. 

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Why is IP valuation important?

IP assets can be bought, sold, or used as securities similarly to tangible property. As such, they are often at the core of the business value that can help in securing financing. A range of factors considered in a valuation will also reflect to what degree your business is able to leverage from these assets and help you prioritize and make better decisions. Similarly, knowing how a competitor, client or licensee can leverage your IP assets can allow you to negotiate a better license deal, set a sales price or in some cases calculate damages resulting from an infringement.

When is IP valuation used?

Consider the following examples of business scenarios where IP valuation is required and who the audience may be:

Situation

Business scenario

Main audience

Licencing

Your business may be doing an independent analysis on an in-licencing or out-licencing royalty calculation.

  • Advisors
  • Investors
  • Management
  • Business partners

Infringement damages

Your business may be calculating a valuation for damages awards as part of an infringement lawsuit or settlement.

  • Courts
  • Legal advisors

Internal decision-making

Your business may be considering various options on research and development investment opportunities, or prioritizing the cost of IP assets to maintain or divest.

  • Management
  • Employees
  • Advisors

Bankruptcy or liquidation valuation

In winding down your business, the courts or trustee may require a valuation for reorganization or selling of the IP assets.

  • Creditors
  • Bankruptcy courts

Financial accounting, tax, or compliance

Your business may be assessing valuation for a financial transaction, such as investor valuations/transactions, or asset securitization. Your business may also require valuation for tax planning or transfer requirements, or financial compliance reports.

  • Tax authority
  • Management
  • Investors
  • Banks or creditors

How to perform IP valuation?

There are a few different ways to perform a valuation and the choice of method will depend on how the results will be used. In sales and licensing, common methods to perform a valuation involve forecasting future sales generated by the IP. This includes assessing to what degree the IP is a share of the revenues from the final product or service, what the future price of the service or product will be, and the expected sales over the lifetime of the IP. When considering forward-looking estimates, past cost of development (often referred to as “sunk cost”) is excluded.

Other methods are based on cost incurred to get the IP to its current state. This could be useful for tax purposes. Some valuations also include the cost related to failed experiments, lost opportunities and lost income. These factors are often considered when calculating damages.

Each of the situations above may carry their own applicable valuation or legal standards in which to adhere. For example, there are international tax planning guidelines on how intangible assets are valued and recognized on a balance sheet, or royalty damage calculations performed based on specific jurisdictional case law relevant to the IP assets. 

Overview of quantitative and qualitative approaches

Quantitative approaches

The following is an overview of the typically accepted quantitative approaches to valuation methods for the IP assets: the cost method, the market method, and the income method.

Quantitative methods

Characteristics

Challenges

Cost method: Valued at the cost to replace or recreate your IP assets

  • Replacement costs may be quantified in various ways, such as design-around costs for patents or brand premiums for trademarks.
  • Typically includes direct costs associated with replacing or recreating the IP asset, as well as the lost opportunity cost associated with the time required to replace or redevelop the IP asset.
  • Benefits include a relative ease of calculation, and defining input values easily because they are often based on direct or defined costs.

May ignore secondary economic benefits or costs associated with your IP assets.

Ignores the full future earnings growth associated with the IP assets.

Market method: Valued by benchmarking them against similar IP assets sold under similar circumstances in the open marketplace

  • Based on market prices of IP assets.
  • Often requires an IP expert that may compare your IP assets to outside evidence sales and then adjust the valuation and associated royalty based on differences between the comparable IP assets.
  • Adjustment variables may include, for example, IP legal strength, length of asset's life, or asset geography (may be important for trademarks or patent sales).
  • Benefits include being able to generate a more comparable valuation to other investments.

Finding comparable data and transactions in similar industries to compare your IP assets to.

Income method: Valued by the income or cash flow it brings to your business

  • Often a top-down calculation based on economic or known business values.
  • Considers projected cash flow associated with the IP over the legal and remaining life of the IP asset's right.
  • Various methodologies used when calculating the projected future cash flow, such as relief from royalty income, incremental income, or residual profits, or the 25% rule.
  • May include analyzing income using a discount cash flow rate over the projected life to determine the present value of the IP asset.
  • Benefits include accounting for future value, especially if revenue is known and can be forecasted accurately.

May include subjective assumptions made for the projections of future cash flow. Standards or case law in some jurisdictions do not allow for certain projected cash flow methodologies.

Qualitative approach

A fourth qualitative approach may be considered but may have a limited audience.

Qualitative method Characteristics Challenges

Qualitative method: Valued partially in non-monetary means.

  • Assistance in your internal business decision-making.
  • Considers various scoring, weighting, or valuation factors relative to your business or market for generating a non-monetary estimate or rating of the IP value.
  • Benefits include taking into account internal criteria considerations that may be important to your business, or accounting for non-monetary impacts.

May ignore financial value, and of limited use for licensing, damages, financial, or other types of reasons for IP valuation.

IP asset type considerations

Within each IP valuation method, there may be IP asset type specific variables that impact the final IP valuation.

Patent specific considerations

Trademark specific considerations

Copyright specific considerations

Trade secret specific considerations

Industrial design specific considerations

Tips

The valuation is almost certain to change over time, so consider updating your valuation based on your business growth, competitive or consumer market changes, legal challenges to your IP asset, or jurisdictional specific statutory or case law changes. 

In Canada, there is no national accreditation or certification of IP valuator as a profession. Valuations are typically carried out by someone who has had specific training in finance and IP valuation. You may wish to consider using an IP expert to assist you in determining the right IP valuation reasoning for your business, what standards (if applicable) that need to be considered, and provide assistance in understanding the variables that impact your IP valuation.

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