Putting a price on IP rights

Over the last couple of decades, marked changes have occurred in way that the value of a company is made up. The days when the major part of a company’s market value was vested in tangible assets (eg, buildings, equipment and machinery) are long gone. Instead, IP assets (eg, innovation capacity, relations to business partners, business secrets, intra-organisational knowledge sharing ability, patents and trademarks) make up a large part of a company’s market value.

However, this development means that increasingly the market value of companies is out of step with their recorded value: this is particularly relevant when companies come to buy, sell, merge or split. Such a development is untenable and has led to a revision of standards for book keeping by, among others, the International Accounting Standards Board.

In licensing negotiations, experience shows that valuing Danish companies’ IP rights may give rise to considerable problems, even failure, when terms of contract are to be negotiated. Therefore, it is crucial that the valuation of IP rights takes place on a clear and transparent basis, with complete traceability of the arguments and methods used. The prerequisite for an IP rights valuation is a so-called ‘business case’, which is then used to determine how the rights, especially patents and trademarks, support the business plan. After this comes an analysis of the individual patents (eg, their strengths, scope of protection, validity and enforcement options). Companies that go through with an actual valuation of their IP rights can obtain an improved overview of their value and which of their rights are principal contributors to that value. In this way, valuable input is obtained on how to manage a considerable portfolio of rights (eg, patents). Danish companies that have chosen to carry out a valuation of their IP rights tend to be more open towards the market, which may make them more attractive to investors, partners and authorities.

There are various different ways to value IP rights, each with their own strengths and weaknesses. However, a small group of methods are commonly accepted and can be varied and combined to form the basis of most methods of IP valuation. These are: 

  • The income method - valuation is based on the ability of the IP rights to generate income in terms of profit on sale of the patented product or royalties from licensing the patents. 
  • The market method - this is based on a valuation that balances supply and demand with reference to earlier transactions that have comprised similar rights on a similar market. 
  • The cost method - value is estimated by the costs (eg, research and development costs and the cost of protecting the rights) of replacing the rights in question.

Unfortunately, the comprehensive and realistic valuation of IP rights is still a cumbersome process, both in Denmark and elsewhere. However, companies can choose to adopt an iterative approach to the task in order gradually to reduce the number of assumptions. This can lead to useful results that may be further refined as the need arises. Certainly, a preliminary valuation is far better than no valuation at all.

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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