IP strategist: Financial modelling for IP strategists
Modelling tools from the world of finance can be deployed to help inform IP decision makers, with their applications extending well beyond outright monetisation campaigns
As IP strategists, we often assess a range of commercial exploitation options for a given set of intangible assets. In most instances, a fundamental objective is to maximise the return on investment, usually through IP monetisation (eg, licensing strategies, sale of intellectual property or joint ventures). It is therefore important to understand how these scenarios stack up next to one another. Developing tailored financial models is an essential component when assessing viable commercialisation alternatives.
By creating valuation models representing various IP monetisation scenarios, a clearer picture is presented and data-based decisions can be made with greater confidence. For a financial model to be useful, it must be customised to match the requirements and expected outcomes of the organisation and keep the IP strategy in line with the company’s broader commercial goals.
With each strategy presented to illustrate its potential outcomes, stronger long-term company strategies can be implemented. Step-by-step strategy plans are defined with target outcomes and milestones clearly articulated.
When to use financial models
When would a financial model be a valuable tool? Over the lifespan of an IP-rich company, there will be various triggers that prompt IP valuations. Here are some scenarios where financial modelling would be of significant value:
- A company wishes to license or sell its intellectual property – a financial model would illustrate how various commercialisation strategies are likely to play out and assess it against its current situation and overall objectives.
- A company wants to measure the potential damages of IP infringement – a financial model is essential to predict or back-calculate how much the infringing party is likely to owe. A model incorporating a variety of scenarios and high-quality input parameters will enable a robust analysis, giving confidence on the outputs.
- In the negotiation of complex IP transactions – which may involve licensing terms, damages calculations and more – applying multiple valuation models enables all aspects of the proposed deal to be analysed, including, if necessary, a model for the other side of the table which shows the likely outcomes for all parties involved.
- A company wants to better understand internal investment calculations to make more informed decisions – a financial model can provide an objective viewpoint and clarify – through key metrics and detailed cash-flow visibility – which decision will benefit the company most.
- A company seeks lending from a bank using its intellectual property as security – a valuation model is a persuasive tool to explain the value of the intellectual property as collateral and to illustrate the cash flows that it could generate.
- Financial modelling is beneficial in scenarios where a company files for bankruptcy or wishes to insure its intellectual property. A model built using an industry-recognised methodology provides compelling evidence to back up a given valuation.
What valuation modelling offers
Valuation models allow rights holders to see their IP strategies from multiple perspectives. They illustrate and compare multiple commercialisation strategies and answer questions such as which partners are most suitable for it to work with and how much revenue can be anticipated. Rights holders can project and visualise potential returns, creating a present-day assessment of the potential value of their intangible assets.
Valuation modelling in practice
Creating the most financially favourable outcomes for an IP strategy requires a deep understanding of the intellectual property, the market and business strategies. Modelling outputs can be used to understand the potential future value of an intangible asset and to support strategic IP decisions. A dynamic model adds further value as a licensing or negotiation tool too.
For example, knowing the sensitivity of the royalty rate on your cash flow, the impact of milestones on your revenue and when you can expect to pay back your investment will put you in a stronger negotiating position. You will have an idea of the preferred deal structure, have better-defined goals and know where concessions can be made and where you must hold your ground. Ultimately, this leads to a better financial outcome for rights holders.
To build a financial model requires an analytical mind, an aptitude for finance and proficiency in modelling software tools. The benefit of experience in modelling scenarios and having IP and market-specific knowledge to draw on cannot be understated. When considering IP valuations, a good foundational knowledge of the IP system is paramount.
Outcomes with models
In addition to providing strategic planning insights and negotiation strength, IP valuation models can provide rights holders with financial forecasts. Companies can use models for various purposes, including the following:
- to quantitatively assess which strategic options are available;
- to choose which strategy most likely represents the best return; and
- as part of company valuations for tax and restructuring purposes.
Companies appreciate the objective nature of the valuation – one which is defensible and built on market data. In each use case, financial models give the rights holder more information and new strategic perspectives, allowing them to make more informed decisions and strengthen their position.