2.11
IP audit and valuation methods
Market value generated by IP
Assets value / Market value is a good indicator
Auditing intangible assets
The purpose of auditing intangible assets within a firm is to ensure that value is captured across the entire organisation
Identifying intangible assets and where value is created, is a necessary first step before valuation can take place.
Identifying where value is created
Value is created by people within the organization or what is called Human Capital
To capture value within firms, and convert it to assets, it must be codified. documented and converted into physical descriptions such as technical drawings, instruction manuals, and written processes.
Also, complementary business assets including networks, relationships with intermediaries, databases, price lists and processes for managing customers are salient to commercialising these IPRs
IP valuation methods
why it is important to value IP?
IPRs can create value for a business (and customers)
IP can generate income streams (for example, by licensing and lump-sum payments)
IP can improve profit margins
IP can help secure finance and funding.
Valuation should commence at the ideation stage and continue to be re-evaluated through the development stage, until your final product is ready for commercialisation.
Valuation involves an estimate of revenue that your idea or concept will generate from future sales. The valuation process involves measuring, or quantifying, the value of the IP created.
There are three valuation methods, which can be conducted on all types of IP:
Market-based Valuation
Income-based Approach
Cost-based Valuation
assesses the amount that a firm would have to pay to replace an asset at the present time, according to its current worth
Examples of costs which should be included in a cost-based valuation
labour costs (inventors, employees involved in the creation of the idea/concept)
research and development costs
costs associated with creating a prototype
costs associated with testing and trials
regulatory approval and certification costs
costs of materials and equipment
costs associated with registering IP (this should include both fees and time)
overheads for utilities, accommodation and support staff
enforcement and litigation costs.
A cost-based valuation should be reviewed regularly, with any cost adjustments or additional costs added.
A market-based valuation uses market comparables to assess IP value.
It considers the value the market puts on the product, i.e. what customers will pay for it.
Limitations
It can be difficult to find published data on IP transactions as they are often confidential.
IP transactions are hard to generalise so difficult to compare. Whilst there are sources of data for various sectors, they tend to provide a wide range of figures for sales and licences which are only broadly comparable.
A market-based valuation requires an understanding of the market i.e. customer base, size and location. As markets are volatile and unpredictable, the market-based valuation can fluctuate and therefore be difficult to assess.
estimates the income-generating potential of the asset over its lifetime. This is referred to as the Net Present Value (NPV) of its net cash benefits.
The income-based approach considers
future income (which IP may generate during its economic life)
costs of generating that income
risk and financial costs are factored into the equation.
The key limitation with this method is that future income is very difficult to estimate.
Value patenting
Patents valued before filing are called ex ante valuations
These are estimates of the strength of the potential patent position and how effective a patent can be for protecting a particular technology
Patents valued after the patent has been granted, are called ex post valuations.
These consider the number of citations the patent has received, i.e. how many times the patent been cited in other patent applications.