How is Intellectual Property Valued When Selling a Business

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Source: | How is Intellectual Property Valued When Selling a Business | Bill Gates, Microsoft’s founder and CEO, once said that “Intellectual property has the shelf life of a banana.”  While everyone strives to expand their market and become the richest among the rich, intellectual property is the oil of the 21st century. However, there is a secret that most of the world’s largest and dynamic companies have been fueling their sustainability: the power of IP Valuation. 

IP Valuation is often overlooked by many of the start-ups and small and medium enterprises (SMEs). Perhaps, they only settle for a suitable and profitable capital that would only sustain them. However, IP Valuation allows companies to dominate the market by concentrating on the value of Intellectual Property Rights (IPR) and Intangible Assets in the business. In other words, while accounting standards don’t evaluate the intellectual property of intangible assets, you can monetize and capitalize the same through IP Valuation. 

The road to becoming rich is now made easy. This article will break down concepts of Intellectual Property Rights, IP Valuation, and Methods of Determining the Value of Your IP.

What are Intellectual Property Rights?

Intellectual Property (IP) are the building blocks of brand value. 

Under the common law, it refers to the creations of the mind – your inventions, literary and artistic works, symbols, marks, designs, books, etc. – that are used in commerce. 

Since it is your “own” property, the federal laws give Intellectual Property rights – an exclusive rights to persons over the creations of their minds with a distinct period. Hence, there are three main areas of Intellectual Property Rights, including the rights related to (1) copyrights, (2) trademarks, and (3) patents. 

Rights related to Copyrights 

Copyright laws protect the expressed ideas or the “original works of authorship” of an artist through arts, music, software programs, and architectural structures. Further, the law allows the original owner to control the reproduction, revision, adaption, distribution, and publication of his work. 

Generally, the precise moment an artist finished his original work conceives a copyright protection. But still, the author needs to register his work to the US Copyright Office to have optimal protection for the government to prevent damages, injunction, and confiscation. 

In the United States, the copyright fees range between $25-$100. 

Rights related to Trademarks 

Trademark is commonly known as a “brand name,” which can be seen in the form of a symbol, word, name, design, or a combination of elements that distinguishes your goods from your market competitors. You can see them everywhere, as statistics suggest that an average person sees 3000 trademarks every day.

Filing for a trademark is a complex process. Most of the time, patent applications failed to succeed. To ease your burden, the world-class trademark attorneys in Bold Patents will help you ease your burden in preparation for trademark application.

As a general rule, you need to file for a trademark application to register your trademark in the United States Patent and Trademark Office (USPTO) to guarantee trademark protection in your brand. Here, trademark protection will give you exclusive rights to prevent others from using or exploiting the registered marks in anyways.

Unlike copyrighted works that last for the lifetime of the owner, registered trademarks are subject to renewal every ten years after the expiration of the original ten-year term. 

Rights related to Patents 

While copyrights protect the expressed idea, patent rights preserve the logic and formula of an invention. Likewise, patent laws protect inventive ideas or processes that are novel, useful, non-obvious, and subject matter eligible. 

Patent laws provide the process on how to file a patent. An inventor needs to undergo a patent search to check the novelty of a patent. When the patent is eligible, then he needs to disclose an invention, and file for a patent application. Hence, a successful patent application lasts for 20 years, preventing others from selling, distributing, using, and importing his inventions commercially without the patent owner’s consent. 

What is the role of IP Valuation in Intellectual Property? 

Intellectual Property Valuation

From a multidisciplinary perspective, most businesses strengthen their company’s financial capital due to their intellectual capital – something that a company cannot bargain with tangible material through intangible assets. 

Intangible assets are your intellectual property in a context that drives the value of innovation in an organization. They are non-physical, which is a by-product of an intellectual property. 

Hence, according to the World International Patent Office (WIPO), IP Valuation is a process to determine the monetary value of subject IP.

Here, the subject IP must have exclusionary rights that are strategically aligned with your business objectives. It should be capable of being sold, without selling the other business assets of the enterprise to the same buyer. And more importantly, there should be some tangible evidence or manifestation of the existence of the IP asset, such as a contract, a license, a registration document, a record on a set of financial statements, etc.

Importance of IP Valuation 

IP Valuation reflects the efficacy and excellent management of your intellectual property inside the organization. Since it integrates the economic value and assist your strategic decisions to be taken in your intellectual property, IP Valuation gives you the best tactics to commercialize and transact in the following:

(1) Merger, Acquisition, Joint Venture or Bankruptcy

Expenditures on knowledge through research and development (R&D), patented software, or copyrighted works have grown at a higher rate than expenditures in tangible assets. Here, IP allows parties to make an informed decision on the determined cost of capital or the financial leverage strategy to be followed. 

(2) Licensing or Franchising 

Knowing the price is right, as ascertained in your IP Value will make two parties have a good deal. In the case of world-renowned companies like McDonald’s, Pizza Hut, KFC, and the like, they make a thorough understanding of the value of the trademarks towards their franchising partners. 

(3) Investment in Research and Development (R&D) 

Intangible assets are drivers to R&D and the company’s innovation. Here, IP Valuation will help determine the budget and resource allocations for the best decision-making. Also, ascertaining the value of your IP will provide strategic guidance for a prospect development, line and brand extensions, managing foreign filing and prosecution costs, etc. 

How is Intellectual Property valued when selling a Business? 

Most IP lawyers agreed that there are three effective ways to determine the valuation of your intellectual property – Market Based, Income Method, and Cost Based Valuation Methods.

Market-Based Valuation Method 

Generally, Intellectual Properties are not developed to be sold. However, in a larger touchpoint, this approach compares the actual price paid for similar IP assets under comparable circumstances. 

The process of valuation will be smooth and accurate if there exists needed information on the nature and extent of rights transferred – particularly, on the price agreed in a license, during litigation settlement. 

Income-Based Valuation Method 

When an inventor or a company has planned for a prospect IP, they have a financial income that is expected to generate. Income-Based Valuation concentrates on the future cash flow derived from a particular IP. 

Here, it requires you to ascertain the revenue flow over the remaining usefulness of an asset, then remove those revenues that are cost-related to the asset. 

Cost-based Valuation Method 

The cost-based valuation method utilizes the principles of substitution and price equilibrium. It primarily employs intangible assets that can be easy to duplicate, or when the projected benefits are impossible to quantify. 

When in a cost-based valuation method, the first thing to remember is the costs incurred in the process of developing the IP and its final value. 

Key Takeaways 

The power of IP valuation is the secret why most world-renowned and economic powerhouses have been sustainable through time. It has shaped the game of market competition and the essence of your intellectual property rights through strategic monetization and wealth.

IP Valuation is a process to determine the monetary value of subject IP. It integrates the economic value of your IP and assists your strategic decisions to be taken in your intellectual property, especially in crucial business transactions, including:

  1. Merger, Acquisition, Joint Venture or Bankruptcy;
  2. Licensing or Franchising; and
  3. Investment in Research and Development. 

More importantly, there are three methods to value your intellectual property in selling to a business:

  1. Market-based valuation method;
  2. Income-based valuation method; and
  3. Cost-based valuation method.

Intellectual property is a shelf of a banana. Peel your innovations now!

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