Various Methods Of ‘Ip’ Valuation
Intellectual property valuation is a recent concept that is still in its infancy, particularly in developing countries like India.To comprehend IP valuation, one must first comprehend the definition of an intellectual property asset. An intellectual property asset is a type of intangible asset (that cannot be touched) that is a mental creation that is owned by an entity and generates revenue for it through licensing, self-creation, or related events.It has legal, economic, and business characteristics and can be legally enforced, protected, and transferred. The useful economic life of an IP asset, on the other hand, is critical for its valuation.
What is IP valuation?
The legality of a property is combined with the economic concept of its worth in asset appraisal. Context is now one of the conditions of (commercial) appraisal. The value of an asset cannot be established without reference to its location, time, and other relevant elements.In the case of tangible assets, there are well-developed techniques for doing so.
IP operations and stakeholders fall into a variety of categories, each with its own set of legal and regulatory requirements.Intellectual property trades have a wide range of terms and circumstances. Furthermore, there are no established trade markets for intellectual property assets. Furthermore, the public rarely has access to the details of intellectual property trades, particularly prices.
As a result, IP valuation necessitates a more specialized approach and sophisticated methodology. Because these methods require a significant amount of time and money, their continuous expansion shows that there are some very real, economic benefits deriving from valuation, a fact that has just recently become apparent.
Factors influencing IP valuation
- Value criterion- Fair market value and Fair Price Value are the most widely utilized standards of value. When it comes to valuing intellectual property, this is crucial. The price at which an object or service flows from a willing seller to a willing buyer is known as fair market value (Market value).Both the buyer and the seller are presumed to be rational and to have a reasonable understanding of the relevant facts. Fair value (Fair pricing) is thought to be a good choice for post-transaction purchase price distribution. It is based on market participants’ expectations when valuing the asset.Fair value is frequently predicated on the premise of value in-use, however fair market value appears to be more acceptable when utilized on the premise of value in exchange. As already said. In most cases, IP valuation is a procedure for determining the fair market value of an intellectual property asset.
- The goal of the valuation- It is vital to comprehend the purpose of valuation in order to determine the premise for value computation. Valuation from the standpoints of market value and investment, for example, might be radically different.The appropriate premise in commercial contexts is market value. “The estimated amount that a property could perhaps exchange on the date of valuation between such a supplier and a buyer in an arm’s length transfer of funds after proper marketing wherein parties had each acted knowledgeably, judiciously, and without obligation,” according to International Value Standards.
- Method of valuation- The technique used and the assumptions made while using a specific valuation method have an impact on the value of IP assets. The most efficient method of valuing is the market method. Companies frequently avoid using the cost method because it ignores the unique characteristics of IP. This method is useful for calculating R&D costs.
- IP asset’s nature and strength- The comparative valuation that an IP asset will hold in the market is determined by its competitive power. The IP value of a product or service is determined by characteristics such as consumer responsiveness and market dispersion. The prospect of new entrants and replacements has an impact on the value of intellectual property assets.
Methods for determining value of IP
The evaluation of intellectual property (IP) can be a difficult task. The best approach for valuing IP assets is determined by the premise of purpose to be drawn from the result, the assets to be valued, and the section for which the valuation is made.
The following are two successful methods of valuing:
- The Market based approach- This is the most widely used method, and it is based on a comparison to the actual price paid for a similar IP asset under similar conditions. If there is sufficient information on the nature and scope of the rights transferred, as well as the circumstances of the transaction (for example, a license negotiated in a litigation settlement), the estimate will be accurate.The procedure begins with market research to acquire transaction information on sales and licensing of the subject IP. The second step is to choose appropriate comparison units, such as “per design,” “per site,” and “per client,” and conduct a comparative study for each unit, taking into account aspects such as profitability, risk, industry, corporate structure, and IP rights strength.
- The Income Method approach- It assigns a monetary value to IP based on the amount of revenue it is predicted to generate. To analyze, predict the revenue flow over the asset’s remaining useful life and subtract the costs associated with the asset. Using a discount rate or capitalization rate, the risk must be deducted from the amount of income.The method is best suited for assessing the value of intellectual property that delivers consistent cash flows. The technique, on the other hand, does not take into account independent risks connected with an IP asset and instead aggregates all of them together to be modified in the discount rate.
The use of intellectual property assets to generate funds isn’t merely a short-term plan. Companies with significant IP assets have a higher chance of success due to increased investment, a lesser risk of bankruptcy, and a better possibility of a successful initial public offering (IPO).
There is a lack of legislation and/or norms controlling valuation, which jeopardizes the process’ regularity and India lacks professionals in this subject because it is a new field. This, combined with people’s unwillingness to shift away from traditional methods of acquiring cash, has resulted in an unusually gradual increase in the country’s valuation.As a result, one of the most important goals moving forward should be to educate and change the thinking of (at least) the target audiences about the monetary value of IP and IP valuation.
Contributed by:– Nidhi Jha, Legal intern at LLL