How do you value your IP?

If your intellectual property helps you to make money for your business, it has financial value – the value of which is important to know, especially if you’re thinking of selling or licensing your IP now or in the future, or if you’re putting a value on your business for investment or M&A purposes.

You may also need to know the value of your IP if you’re committing it to a joint venture with someone else.

But how do you know what is the value of that IP?

After all, there a variety of factors that may influence what it is worth, on top of what you have spent to bring it into existence and create recognised value in it.

For example, if your IP has required testing or certification prior to coming to market (most relevant to patents), having fulfilled these milestones is likely to make it more valuable.

Likewise, registered IP (trademarks, design rights and patents) is more valuable than unregistered IP, because the value contained within it is more certain, more easily protectible and measurable.

If the IP is well-established and widely recognised, and the market to which it relates is also well-established, then any licensee or assignee takes on far less risk and this can result in a higher value being attributed to it.

And then there are the events that might affect this value and make it unstable.

It’s also a rare type of IP that withstands the test of time.

A lot of IP will naturally devalue over time.

Here are 3 main ways you can value your IP.

We’ve explored them here.

Ultimately, the method that most suits your own business may very much depend on the type of IP you have in your business, how well you have protected your IP, how long you have been in business and the competitive and economic market conditions in which your business operates.

And of course, why you’re looking to value your IP in the first place.

1. The cost method

What it means:

This is based on how much money it took to get the IP rights yourself and how much it would cost to recreate something similar.

You can include here, for example:

1. registration costs
2. design/creation costs – like creating a prototype, testing, staffing costs directly involved
3. utility costs directly attributable to its creation / running
4. materials and equipment

And the method assumes that your assignee/buyer or licensee or other third party will not have to incur these costs.

It’s good because:

It enables a pretty swift licensing or assignment/sale transactions, with the value paid by a licensee or purchaser being based on your financial valuation.

It can save time, money, and reduce risk of infringements if money has already been spent on registrations and enforcement activities.

It’s often used in connection with the sale or purchase of a business or similarly acquisition of IP assets when they are at a very early stage of development.

It’s not so good because:

It doesn’t take the profitability of the IP into account, and it doesn’t include projected figures, which means the IP doesn’t show its potential future value and as the IP-owner, you get less from a licensee or assignee than you otherwise might.

2. The market value method

What it means:

This is based on how your IP has recently been valued in the market.

If you’re not sure what it’s worth, you could calculate this by looking at how similar IP has been valued at over the last few months.

This isn’t the easiest exercise, however, mainly because the information is not readily available.

Alternatively, you can instruct an expert (for a fee) to gauge what the market value might be.

It’s good because:

It provides a good indication of what people would pay for your IP, and it can provide you with a look at the range of royalty rates across your industry – giving you key data on which to base your negotiations with potential licensors.

It’s not so good because:

Finding information on IP sales isn’t particularly easy, as it’s often treated as confidential and therefore not publicised.

And even if you do find information of the sale of similar IP, the specifics of the sale agreement itself may differ to one you would have (e.g. payment structure, exclusivity details, market conditions, territorial and regulatory impacts, etc.).

Instructing an expert to help comes at a cost too – though if the outcome is an assessment that attaches a lot more value to what you’ve created than the cost method produces, then that fee may be fully justifiable.

3. The income method

What it means:

This is based on how much revenue your IP could earn you in the future, minus the costs and risk it could take to make that revenue.

The result of that equation is known as net present value (NPV).

It’s good because:

It doesn’t require a significant amount of research into hard-to-find data, such as the market value method, and it’s likely you already have most of the data to hand from your own financial records and business plan.

It’s not so good because:

It’s not 100% accurate, as the valuation is based on estimates of future performance – which could change unexpectedly and materially due to things like the competition, economic climate, etc.

It’s not easy to estimate the economic life of IP or what income will look like over a period of years.

With this in mind, this method only really works for income valuations up to 4 or 5 years and in relation to more established IP, which is likely already being licensed to some extent.

Typically, businesses will use all three of the methods above to determine the value of the IP and setting royalties.

As it is not an exact science, and brand value is worth the amount someone is willing to pay for it, it often leads to a discussion during negotiations for sale or licence.

Depending on your commercial appetite and the amount of money invested in the party purchasing or licensing elements of you brand you may want to at least cover your costs, but you may want extra.

If this is unfamiliar territory for you, we suggest gauging opinion from a few experts, as to what the commercial arrangement is worth and this should be reflected in sales price, advance licensed fees, and when setting royalties.

A useful checklist

Though there isn’t any real guidance on this from the Intellectual Property Office of Ireland (IPOI) we have found a useful checklist from the UK Intellectual Property Office, to help you form a view of how valuable your IP is likely to be.

You can find this checklist here

It’s a great starting place.