Intellectual Property - How can we value it if we just don't get it?

Posted 1st July 2013

Written by Scott Simmons

Intellectual property: most of us can name the main types (copyright, trade marks, patents, design rights), but ask most SMEs (Small or Medium Enterprises) outside of the technology or pharmaceutical industries whether their business has any IP of value and most will say no.

So then you dig a little: does your business have a website?  Do you have a client list?  A database?  Does your business require know-how or confidential information that only you have?  Almost all will answer yes to the first three and some will have the fourth.

Most SMEs will tell you that, to them, all of the above is bundled in to 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.  And while the examples above may contribute to a business’ goodwill, they are also identifiable IP that not only give rights to the business owner, but also add value to the business’ balance sheet.

But why look to value IP if you don’t even think you have any?

If you have given thought to my second paragraph, the chances are you are starting to realise that your business does have IP that you can protect and value. Identifying and valuing it has a number of benefits:

  • It can help assess what the IP 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 are increasing looking at IP for fund raising purposes;
  • The shares in your company could be worth more than you thought;
  • As the owner of a business, 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?

Ok, so you’re on board with the idea that your business may have IP, but can it be valued accurately?

There are a number of factors to consider at this point:

  • Who has title to the IP?  Seems obvious, but it’s worth checking in case it’s not part of the corporate structure you thought it was;
  • If it needs to be, has it been registered?  Not all IP needs to be registered and those that do may not always have been done correctly or to its fullest extent.  Regular evaluation is needed to ensure, for example, that your trade mark is still registered against the correct classes;
  • Has your IP been infringed and what are the costs of enforcement?  Sometimes enforcing your rights can be more expensive than the value of the IP;
  • Does the IP really add value to your business?

Having gone through this examination, there are a number of methods for valuing your IP, which you can discuss with your advisers, but the value will often depend on the circumstances of the business 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 then 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 other assets, such as property, 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; why do it to your business?

For more information contact Scott Simmons on 01423 789 888 or scott@newtons.co.uk

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.