Everybody knows IPR (intellectual property rights) have a value, but the very reason IPR are used, to safeguard unique products or designs, makes them extremely difficult to value as there are often no comparators. Most people think of IPR as Trade Marks, Patents and Copyrights. However there are many other categories, notably design right, data base rights and domain names.
The IP Office reports industry norms for patents at 25-33% of anticipated gross profits (pre tax) and 10-15% for trademarks. This provides a useful starting point for negotiation but the vagaries of IPR ensure it remains only a starting point. As IPR tend to be unique there can be no direct market comparison and trying to base valuation on time and money spent creating the right is a pointless exercise. There are various criteria that can be used to value IPR, yet no valuation method will work in all circumstances, Set out below is an overview of relevant considerations.
Before trying to evaluate your IPR assets you need to assess what you own. The audit will focus on:
- identifying your IPR;
- the nature and strength of your IPR;
- whether there is an existing market for the associated product or whether one need to be established;
- the level of confidentiality maintained; and
- any 3rd parties with existing rights in relation to your IPR.
Protecting your IPR Assets
You may need a 3rd party to review your business to establish what your IPR portfolio comprises. Often people fail to take the necessary steps to protect IPR. Considerations here include:
- Should the IPR be registered?
- For how long are the IPR valid? What is the duration of the IPR and what is the revenue generation potential?
- Do you have the finances to withstand litigation if your IPR are challenged?
- Do your IPR safeguard your position by creating barriers to market entry?
- Are there still extensive costs involved in bringing the associated products to market?
- What is the economic climate and how will it affect sales of your product?
This can be achieved by licensing or outright sale. In determining the best approach in this context it is important to look at:
- Cash flow and long term benefits of each option
- Probable lifespan of your IPR (e.g. patents have a renewable lifespan of 20 years)
- The extent of your potential market and your current market share?
- If there is a royalties element to the sale you need to evaluate not only the percentage paid but also the distribution network, and the potential for complementary products of the buyer or licensee.
We outline below 3 recognised valuation techniques, cost evaluation, market valuation and economic benefit evaluation. These are most appropriate for product based IPR.
This takes into account the following factors:
- Cost of development: labour, materials, equipment, research and development.
- Likely cost of creating a similar product
- Acquiring approval and certification
- Registering IPR
Whilst this valuation method typically appeals to sellers as a reflection of the time and effort put into the product, it may not be so popular with buyers. This is because the factors taken into account have no direct correlation with the revenue and profitability that the buyer will generate.
This is based on the IPR and licence sales of similar products. However this is often problematic.
- How do you compare a unique product? The lack of comparable offerings on the Market may make valuation by comparison extremely difficult;
- Most contracts relating to IPR are kept confidential.
Economic Benefit Valuation (EBV)
This is assessed by looking at the value added, i.e. what income may be generated in the future against the cost of generating that income over the lifetime of the IPR. This is then discounted to allow for risk and cost of development. This method has its own problems:
- How do you determine the period during which IPR are likely to generate revenue. Whilst the duration of the right may be fixed, there is no crystal ball for future market developments notably the economic environment and new competition.
- How do you accurately assess the amount of income generated solely by the IPR when other factors such as knowledge of the market and ability of staff also play a vital role?
- How do you estimate the income and demand for a product at an early stage of development?
Knowing the value of your IPR is crucial both when protecting it or selling it. Any prospective purchaser or licensor will have their own idea of its value so it is vital for an IPR owner to have an idea of its true worth.
For more information, please contact Simon Halberstam.