I am pleased to post an article by Weston Anson on IP valuation. Wes is Chairman of CONSOR®, a leading intellectual asset consulting firm specializing in trademark, technology, and copyright licensing, valuation, and expert testimony. The firm is headquartered in La Jolla, California with offices in New York and London.
After receiving his MBA from Harvard, he served with the management consulting firm of Booz-Allen & Hamilton and then at Playboy Enterprises, Inc., where he launched many of their licensing programs. For the last 20 years, he has led the way in developing accepted methods to value brands, technologies and other IP for corporate and legal clients. He is an expert in establishing licensing strategies, as well as developing and managing licensing programs for clients. Wes has authored several books on intellectual property and related business issues. The ABA in 2010 published his newest book, “IP Valuation and Management,” which I have read with interest. More information about Wes and Consor may be found here.
Wes’ post follows:
Guest Post by Weston Anson
Intellectual Property (IP) valuation is an increasingly important aspect of managing assets in the currently complex and ever-changing business world. This post outlines the three accepted valuation approaches and comments on their application in measuring IP.
Who Cares About IP Values?
The following stakeholders are among those who need to ensure the accuracy of IP valuation:
a. Banks because their collateral rests in many cases on the underlying IP values of their borrowers;
b. Investment bankers, private equity funds and merger financiers who own or acquire IP
c. Taxing authorities whose revenues are generated by transfers of IP assets;
d. Auditors of public companies; and
e. Finders of fact, whether judges or arbitrators and the parties to these proceedings.
When Is Valuation Necessary
Valuation is necessary in a number of context-specific situations including the following:
- In a sale, merger, joint venture or similar commercial transaction;
- In a divorce whether personal or business
- In a bankruptcy
- For estate planning
- When licensing IP; and
- In litigation
What Are the Three Basic Valuation Methodologies?
Valuation analysts and IP professionals agree there are three standard methodologies to value IP: the cost, the income and the market-based methods. Here is a brief summary of each.
The cost approach: this method, whether based on historical or future cost, focus on substitution. This means that the worth or value of an IP asset is no greater than the costs to obtain or reproduce the asset. The cost can be measured by purchasing the asset today, by replacing the asset with a substitute of equal quality or by creating an absolute reproduction of the asset.
IP cost measurement includes: direct costs, such as for materials, designs, marketing, legal, personnel and engineering; soft and indirect costs such as development time; overhead costs and a profit percentage for the developer of the asset.
The market approach: It is applicable when a truly active marketplace exists and actual comparable transactions can be found. But at least until this decade, most IP assets were not being bought, sold, or licensed frequently enough to establish a value based solely on direct market-based comparables. Therefore, it is often necessary for an experienced IP valuation expert to adjust and analyze existing comparables to arrive at an accurate value.
Further, in selecting a suitable comparable transaction, one must focus on the context in which it took place; was the transaction a bankruptcy filing, a divorce, an estate settlement, litigation or perhaps a forced transaction or divestiture? Any one of these may render a specific comparable transaction unsuitable for analysis—unless one makes a compensating adjustment to the transaction. But when reliable data is available, the market approach is considered the most direct and systematic method for accurately valuing intangible assets such as IP.
The income approach: This is perhaps the most widely used IP valuation approach. It is based on the assumption that the value of a piece of IP today results from the financial benefits that can be generated and estimated into the future for whatever remaining expected useful life the IP may contain.
The income approach requires substantial knowledge and judgment on the part of valuation analyst to decide a key issue: how to measure the income attributable from the asset. Is income going to be measured by some theoretical royalty or rent to be received? Will the income be measured as the premium price commanded by the products using the IP? Or will it be measured as some portion of the operating income of a company’s overall operations or for a specific technology or brand?
Whatever the method of valuation chosen, IP can have multiple values at the same time and all those values can be correct simultaneously. That’s because, unlike real estate, IP can have vastly different values depending on who owns it and how they intend to use it.
Which Valuation Approach Should You Use?
The answer depends on four factors: (i) how unique is the asset; (ii) how much data is available and verifiable; (iii) what is the context, purpose or objective of the analysis; and (iv) the judgment of the analyst which (one would hope) is based on extensive earlier experience.
A parting thought: as the IP world continues to evolve and expand, the blurring of IP will increase. For example, software may now be patent, copyright and trademark protected. This blurring will only increase the complexity and challenge of IP valuation.
Thanks Wes and for those who wish more information I suggest you contact him at firstname.lastname@example.org.