IP Valuation – The Income Method – by Sejal Chaturvedi
Intellectual property rights are those rights that give people right over their unique, original, and exclusive creation and innovation. These creations range from the logo of a company’s new technology to designs of products, formulations of products, literary work to the layout of the circuit. Hence IPR covers a vast range of assets developed by the human mind. Therefore, creating these assets takes a huge amount of effort, time, and most important monetary investments. Further, it also involves the costs of risks one is taking, the cost of failed products, or those which couldn’t be made feasible for the masses. These IPs must yield monetary and economic benefits to the owners to provide them ROI. Therefore, it is essential to monetize the IPs at the right valuation.
RELEVANCE OF IP VALUATION
The value of an intellectual property asset stems primarily from the right of the asset’s owner to prevent rivals from utilizing it. To have a quantitative value, an IP asset should:
- create quantifiable economic advantages for its owner/user; and
- increase the value of other assets to which it is linked
The value of an intellectual property asset indicates the prospective economic advantages to the IP owner or authorized user in the future. The value may be obtained by:
- direct utilization of the IP through product integration;
- selling or licensing of intellectual property to a third party; and
- other measures, such as increasing entrance barriers or minimizing the danger of substitutes
PROCESS OF VALUATION
The valuation process of any IP is very intensive. It requires having wholistic information of the IP asset as well the prospect of IP. The most crucial aspect of IP evaluation is gauging the prospect of the said IP, it includes the utility of IP, the size and position of the relevant market, the power to disrupt or change the current scenario of the market, and lastly consumer behavior. It is crucial to value your IP at the right amount because it is essential in the enforcement of your IP rights, management of the asset, and course for the account books of the company.
Apart from this, some requirements have to be met, in accordance to
- It must be distinct from the others (subject to specific identification and with a recognizable description)
- There should be tangible evidence of the asset’s existence (e.g., a contract, a license, a registration document, a record in financial statements, etc.)
- It should have been made at a specific moment in time.
- It should be legally enforceable and transferrable.
- Its income stream should be distinct and distinct from those of other firm assets.
- It should be able to be sold separately from other company assets.
- It should be capable of being destroyed or terminated at a specific point in time.
DIFFERENT METHODS OF VALUATION
Generally there are three methods of valuing any IP-
- Market method
- Cost method
- Income method
THE INCOME METHOD
The income-based valuation technique bases the value on the money that the IP is projected to earn in the future, as well as the economic advantages that it will provide to a firm during its useful economic life.
Income-based strategies entail projecting possible future revenue, risks, and expenses associated with the IP. You must utilize these to compute the IP’s net present value (NPV), which will be either positive or negative. The discounted cash flow (DCF), earnings capitalization, and royalty relief techniques are three examples of income-based valuation approaches.
The advantage of this method is it can be applied to all Ips and at any stage of asset development. However, this flexibility and bid on the future in itself is a drawback. The value of your IP then is determined by the analysis of the bidder or who is willing to buy/license your IP. It is then determined by how much in his wisdom the IP should yield an income to him/her. Further, the buyer also entails the risk of failing if the IP asset.
The income method is best used in scenarios of licensing of the IP, to IP implementers. The help technology gets transferred to those who don’t have the capacity for investing in IP development.
It can be summarised that when one generates an IP the ulterior motive is always to make money or to increase/enhance the business. Thus, it is highly essential for evaluating the IPs at such a rate that not only are the IP owners are enabled to gain ROI, but also the worth of their business or brand is enhanced. An IP has to be managed equally well as one shall manage its real estate.
The views are that of author’s own and not necessarily the views of IPTSE Academy. This blog is a platform for academic discussions and hence authors have been given flexibility to convey their thought process.
Symbiosis Law School, Hyderabad