An Indian perspective on the valuation of intellectual property

The term 'valuation' refers to the assessment of technology in regard to market requirements for a business, and is considered to be an integral part of business. In India, as elsewhere around the world, this issue cannot be underestimated in relation to intellectual property, where valuation plays a crucial role in determining the genuine need for technology and how likely the customer is to adopt it. While intellectual property – in the form of various intangible assets – essentially requires an analysis of customers’ desire, the evaluation must also be balanced between research activities and commercialisation. The concept of IP valuation is important due to expenditure on R&D activities to achieve an invention and arrangement of the financial aspects. This intangible asset plays a key role when considering demand versus supply to meet public requirements, as well as to maintain supply chain management.

Identifying value
IP valuation is critical due to various complex economic mechanisms which fluctuate as a result of state and business policy. In this regard, it is pertinent to search and evaluate the evidential and essential pre-requisites for the intellectual property generated by the owner, including the monetary consideration used in research, planning and execution, and the legal costs and risks involved. At the same time, IP valuation requires the evaluation of financing with respect to technology transfer and the corporate structure of valuable assets. Sales and licensing are also important factors when carrying out a valuation.

Although the traditional method is based on costs, the market and the economy, each technique has its own advantages and disadvantages. While the evaluation method and approach-based results fully depend on the analyst's understanding, it is advisable to comply with rapidly evolving technology. The concept of innovation is now completely new; skilled people deal with the steps – from ideation to delivery of products – to meet the public benefit requirement. Although it is traditional to consider factors such as competitive strategy, profitability strategy and reverse mechanisms for innovation, quality should be the major factor when evaluating and deciding the prospects of a business.

Choosing a valuation approach depends on factors such as:

  • the uniqueness of the asset;
  • the amount of data available and how verifiable it is; 
  • the context, purpose or objective of the analysis; and
  • the analyst’s judgement.

The cost approach measures IP value by calculating the costs incurred and does not reflect the earning capabilities of an IP asset. For this reason, it is often used to analyse intellectual property which has not yet been commercially worked, and is most effective for nascent technology or IP rights without specific market application or for which the market has not yet been identified. In general, the cost approach provides a minimum value for the intellectual property. Under this approach, intellectual property that costs more to develop is more valuable, which is not always true.

In contrast, the market-based approach is often used where there is an existing active marketplace for intellectual property and actual transactions can be found. In practice, the market-based approach is preferred if there is commercial transaction data for an equivalent or similar IP right which is already being worked commercially by way of sale, transfer, licence or other activity. The accuracy of the valuation depends on the level of information provided (eg, the terms and conditions, and circumstances of the transaction).

Finally, as the name indicates, the income approach forecasts the future income stream of an IP asset which is adjusted to its present-day value. This is best suited to investors, as they wish to know how much income the IP asset will generate in future, the risk involved and how soon the investment will be recouped.

Challenges ahead
Valuing intellectual property can be a difficult task. The value of intellectual property changes over time, which makes valuation complicated. In order to value a piece of intellectual property, its IP assets must first be identified. Identifying the IP assets can prove to be complicated and requires careful consideration. A company may possess various types of asset that qualify as intellectual property but may be overlooked. For example, the value of a pending patent application is uncertain until the patent has been issued, thus proving difficult for valuation purposes. Other challenges could be difficulties in the potential market and the market share estimation, and selection of the appropriate discount rate. Therefore, it is advisable to adopt a combination of approaches to achieve the optimum valuation.

For Indian IP rights holders, a valuation of the IP right is vital to confirm the worth of technology. However, there is still a need to identify and examine the multidisciplinary perspective of the R&D work which is capitalised into the effective valuation. Other factors which affect value and should be considered include litigation, marketing and strategy, demand and necessity, and finance and tax. Accordingly, both the existing and prospective markets for IP asset should be considered in order to craft an economic strategy. 

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

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