Intellectual property (IP) is a non-physical creation of the mind or the product of a company's work or reputation. It is essentially ideas that are executed to become successful business assets and are often copyrighted, under patent, trademarked, or considered trade secrets, to protect from unauthorized use. Technology is a key IP type in our largely digital world and is a major driver of change and progress in nearly every industry. As a result, IP is a very important aspect of the valuation of a company. In our modern global economy, some countries recognize more IP types than others, as circumstances vary.
While IP can be extremely valuable, it is actually difficult to value fairly. This is because it’s intangible, especially in today’s tech-driven world. Having an accurate valuation of IP is vital to getting fair market value when selling your company. Businesses usually invest heavily in creating their own IP. But if the value of that IP is not properly valued, the balance sheet will only reflect the investment into creating the IP, and not its actual worth. This will result in your company being undervalued, and you not getting what you deserve in a sale price. The method that you use to value your IP may vary based on the reason why it is being done, such as for mergers, acquisitions, accounting, taxes, or transfer-pricing purposes.
IP Valuation Methodologies
The three common types of IP valuation methods are market-based, cost-based, and income-based.
Market-based calculates a market price from observations of comparable IP third-party transactions. It is usually used for licensing deals, corporate disputes, tax defenses, and the purchases/sales of businesses. This method is based on actual data and is more straightforward as it does not involve estimates. However, finding reliable data for comparability can be challenging.
Cost-based is based on the cost of creating and developing the IP. It is usually used for patent valuations, portfolio valuations, mergers and acquisitions, investment seeking, and licensing IP. This method usually offers easy access to relevant data, but it only sometimes accounts for the market value or future potential market value of the IP.
Income-based is derived from future projected cash flow stemming from the IP. It is commonly used for selling or buying a company or licensing an IP asset. This method can be flexible, but it relies on future hypotheticals rather than real data. It also tends to be more complicated to execute.
With different valuation techniques, how do you know what is right for your company? There are several factors you can consider, such as the type of IP, data availability, and company structure. Just keep in mind that the most reliable method is not always the one that leads to the most favorable financial outcome in a sale. It should be fair to both parties, as well as justifiable to tax authorities. A professional M&A advisor can help you determine the best IP valuation method for your business. They can eliminate a lot of the guesswork and will know how to get you the most value in a transaction because they deal with these complex issues every day.
IP Laws and Regulations
Laws and regulations regarding IP are always changing around the world, especially as globalization and international trade increase. This is important when it comes to cross-border mergers and acquisitions and how companies structure their IP ownership. IP rights are territorial to countries. You may have a patent in one country, but you have to patent it in other countries if you want protection in those regions. Many international companies try to move their IP to lower-tax regions because revenue must be based on where the profits are earned. This is why there are so many international treaties between countries to better align legislation. Today, there are more than 200 international treaties that regulate matters related to IP. IP laws are also being forced to adapt to and keep pace with the rapid evolution of technology in today’s world.
Getting a Valid IP Valuation
It is important to keep in mind that you should be practical regarding your expectations for the valuation of your IP. If it seems too high, it probably is. And you should also be prepared for scrutiny from tax authorities, so you will need to back up your numbers. In the sale of your company, the IP value should be fair to both you and the buyer. An M&A advisor or an IP valuation expert can help you get a reliable IP valuation for the sale of your business. Having a pro in your corner can lower your risk of getting audited or penalized for wildly inaccurate valuation, leading to headaches and lengthy disputes. It also shows good faith in your efforts to a buyer.
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
ABOUT BENCHMARK INTERNATIONAL:
Benchmark International is a global M&A firm that provides business owners with creative, value-maximizing solutions for growing and exiting their businesses. Benchmark International has handled over $8.25 billion in transaction value across various industries from offices across the world. With decades of M&A experience, Benchmark International’s transaction teams have assisted business owners with achieving their objectives and ensuring the continued growth of their businesses. The firm has also been named the Investment Banking Firm of the Year by The M&A Advisor and the #1 Sell-side, Privately Owned M&A Advisor in the World by Pitchbook’s Global League Tables.