How Do You Value Intellectual Property?

Posted 29th June 2021

Written by Scott Simmons

Intellectual Property

Intellectual property is often misunderstood, and it can be difficult to know how to value intellectual property when it’s something that isn’t often intangible. Moreover, there’s a distinct difference between intellectual property and intellectual property rights, both of which need to be understood. If you own a business, it’s important to get your intellectual property valued. To help you get a better understanding, in this post, we’ll discuss the different kinds of intellectual property and how it can be valued.

 

What is Intellectual Property (IP)?

Often, intellectual property is explained as anything that is made as a result of a creative endeavour – this can be an idea, a product design or a brand name. However, businesses often have other kinds of intellectual property as well.

The difference between intellectual property and intellectual property rights is legal protection. Intellectual property refers to an abstract concept of anything that is a product of the mind. Intellectual property rights are bestowed by applying for a copyright or patent – in essence, any legal precedent that registers the intellectual property as your original creation.

 

The Different Kinds of Intellectual Property

If you ask most SMEs (Small or Medium Enterprises) outside of the technology or pharmaceutical industries whether their business has any intellectual property of value, most will say no. However, there are other types of intellectual property – these include (but are not limited to):

  • A website.
  • A client list.
  • A database.
  • Specific know-how or confidential information that only you have.

Almost all businesses will have the first three kinds of intellectual property, and some will have the fourth. Most SMEs will tell you that, to them, all of the above is bundled into their goodwill.

Case law has defined goodwill as ‘the attractive force which brings in custom’, or ‘whatever adds value to a business by reason of situation, name and reputation’. It is whatever makes a customer choose your business over someone else’s and keeps them coming back.

While the examples above may contribute to a business’ goodwill, they are also identifiable intellectual property that gives rights to the business owner and adds value to the business’ balance sheet.

 

Why Should You Value Intellectual Property?

The chances are you are starting to realise that your business does have intellectual property that you can protect and value. Identifying and valuing it has many benefits:

  • It can help assess what the intellectual property is really worth and whether it can be enforced, whether you are the owner or the buyer, licensor or licensee, franchisor or franchisee, supplier or distributor.
  • Banks and other lenders increasingly look at IP for fundraising purposes.
  • The shares in your company could be worth more than you thought.
  • As a business owner, you should know what assets you own and what they are worth.
  • It can help strengthen your position when entering into a joint venture.
  • With a properly valued asset comes a more realistic (and very often higher) valuation of royalties when the asset is licensed to a third party.
    – This is particularly important if the IP is moved offshore and licensed back between group companies, which must be at arm’s length.  Without a proper valuation, how can you say for certain that the transfer and royalty rates are correct?

 

How Do You Value Intellectual Property?

There are several factors to consider at this point:

  1. Title

Who has title to the IP? It’s worth checking, in case it’s not part of the corporate structure you thought it was.

  1. Registration

If it needs to be, has it been registered? Not all intellectual property needs to be registered. Those that do may not always have been done correctly or to their fullest extent. Regular evaluation is needed to ensure, for example, that your trademark is still registered against the correct classes.

  1. Infringement

Has your IP been infringed? What are the costs of enforcement? Sometimes enforcing your rights can be more expensive than the value of the intellectual property.

  1. Value

Does the IP really add value to your business?

Having gone through this examination, there are a number of methods for valuing your intellectual property, which you can discuss with your advisers. Still, the value will often depend on the business’s circumstances at the time of valuation, such as the purpose for which they will be used, the potential market, any competitors. Therefore, the IP may be more valuable to another business than your own.

Understanding these issues puts you in a strong position should you wish to sell or license the IP. As long as the chosen method for valuation is applied properly, your IP has a value that you can use going forward.

 

You may not be able to put your hands on intellectual property like you can with tangible assets, but in the 21st Century, intellectual property is becoming ever more important for the growth and sustainability of businesses. Think of it this way – you wouldn’t sell your house without getting it valued, so why do it to your business?

For more information or to discuss how to value your business’s intellectual property, please contact us online or call us on 0800 038 5500. Our corporate, company and commercial law specialists will help guide you through the valuation process.

 

The information contained in this article is intended for guidance only and is not intended to provide specific legal advice to you or your business. Expert advice on any issue should always be obtained. Newtons Solicitors Limited does not accept liability for any loss that may arise from relying on or using the information contained in this article.