The value of intellectual property and intangible assets (or “IP”) is estimated to represent 75% to 85% of the collective value of companies in the United States. As the relative importance of these assets has increased, so too has the need for companies to successfully understand, create, manage, protect and value them. Patents, trademarks, copyrights, trade secrets, customer lists and relationships and other data driven assets are critically important to companies’ ability to innovate and grow in an increasingly global and competitive economy.
While companies often intuitively recognize the importance of IP assets, they often struggle to identify and value them. Without an accurate understanding of the IP you own – and their values – it can be difficult to make prudent business decisions about developing, protecting and monetizing your IP.
Companies may miss out on opportunities (or create threats to their business) with significant financial consequences if they do not have a complete catalog of their own IP assets or an understanding of how they might be infringing – even inadvertently – on other’s IP. Patents, trademarks and copyrights are the most common forms of IP and are relatively easier to identify and inventory. However, other IP assets, like trade secrets, customer lists and relationships and data sets are often overlooked, despite their potential to have significant value. For some types of IP assets, the owner must take steps to identify and protect their IP assets or they may lose their rights in them.
In general, value is created when the financial benefits of owning an asset exceed the costs of developing or acquiring it. IP assets can generate financial benefits by increasing revenues (including from royalties), increasing market share, providing a competitive advantage, excluding competitors, reducing costs or providing market intelligence. Costs related to acquiring IP assets can include research and development expenses, legal fees, paying royalties and data gathering, litigation and security costs.
IP assets are valued for a variety of reasons, including decision making (research and development budgeting and resource allocation), financial reporting, tax compliance and litigation. Like the valuation of a business, there are three basic approaches to valuing IP assets – the income, market and cost approaches. In their own way, each approach attempts to answer the fundamental value question – do the benefits exceed the costs?
Key questions to ask when valuing an IP asset include:
- What is the IP – is it a patent, trademark, customer list, etc.?
- What is the useful economic life of the asset (how quickly does the industry change)?
- How important is the IP – is it a new mousetrap or just an improved mousetrap?
- Are there any alternatives available – and at what cost?
- Are there regulatory issues (e.g., government approvals)?
- How does this IP enhance the company’s bottom line?
Interested in learning more about IP assets and their valuation? Please contact Keith Hock or Brian Bornino.