How is an IP valuation done?

Most businesses, particularly those in the technology sector, are realizing that their most valuable asset is their intellectual property (IP) as a result of the widespread impact that technological advancements are having on the global economy. This has led to a global shift in how IP value is governed.?

When engaging in a commercial transaction involving intellectual property (IP), such as a purchase, sale, license, or merger/acquisition, it is crucial to have a firm grasp on IP valuation and the various valuation methods available to you.

Approximately $10.37 billion was the value of U.S. intellectual property export fees in February 2023. The value of intellectual property use fees exported in the previous month was around 10.42 billion US dollars, thus there has been a minor decline in the number.?

There are a variety of legal tools available to you to help safeguard your intangible assets so that you may reap the benefits of them in the future. Your company's strategy should include IP protection and management.

What is an IP Valuation?

IP valuation , in its simplest form, is the act of putting a dollar value on anything that is considered intellectual property. Because intellectual property is intangible, its worth may be affected by many different variables. Intellectual property (IP) may be hard to describe and harder to appropriately price.

The worth of IP may alter over time for a variety of reasons, including changes in the market, advances in technology, and the distinctiveness of the IP itself. The value of intellectual property may also be impacted by shifting regulatory frameworks. It is important to have trustworthy and sufficient data at hand when assessing an asset's worth and to be able to draw a comparison to the value of a comparable intellectual property asset.

Why is Valuation important?

In today's service-based economy, intangible assets like patents, trademarks, and other forms of intellectual property (IP) are becoming more valuable than tangible resources like buildings, machinery, and stockpiles.?

Although Ford and General Motors' manufacturing facilities and inventories likely accounted for most of their worth in 1960, Tesla's value now lies not in the automobiles it manufactures or its manufacturing facilities, but in its underlying technology and intellectual property.?

The opportunity cost of investing in IP development is another concern. Many businesses need to invest heavily in R&D despite its high cost. A company's worth may be underestimated if a balance sheet simply reflected the cost of developing new intellectual property rather than the full economic benefit. This, in turn, may have repercussions in areas like accounting, taxes, and the profitability of mergers and acquisitions for investors.

Regulations of IP Valuation

The OECD has stated that many multinational corporations have moved their intellectual property (IP) to low-tax jurisdictions to reduce taxes and enhance profits, which has led to the inaccurate allocation of revenue generated by intangibles.?

Recent current and planned rules aim to allocate funds to the appropriate jurisdiction according to the source of the funds. If Apple's iOS generates $3 billion in sales, $1 billion in the United States, and $1 billion in China and Europe, respectively, that $3 billion in sales must be distributed to the regions in which those sales occurred, and not to a negligible-tax jurisdiction selected by Apple to avoid a higher rate of taxation in the countries in which those sales occurred. A sale made in a country other than the one in which the firm is incorporated is considered a cross-border transaction under these rules.

How to Value Intellectual Properties?

The three main types of approaches to determining the worth of intellectual property and IP rights are the income approach, the market approach, and the cost approach. IP valuation approaches vary according to the nature of the IP, its current state of development, the value's intended use, and the information at hand.

Income-based Approach

Income-based IP valuation, also referred to as an economic benefit approach, considers the asset's predicted revenue or cash flow throughout its economic life cycle.

Market-based Approach

The market approach considers the prices paid by unrelated parties for comparable IP assets. Finding trustworthy information about IP that is reasonably comparable to the IP being assessed is essential to this technique. This information should include details about the transactions involving the comparable asset(s), including selling prices and royalty rates.

Cost-based Approach

When determining an asset's worth, cost-based valuation techniques take into account the total amount spent on the asset's creation, development, and maintenance during its economic lifetime.

Hybrid Approach

The relief from royalty method is a hybrid strategy that combines market and cost approaches to determine how much a firm may save on licensing fees or royalties if it were to buy the asset outright rather than license it.

Recently Valuing IP, a Malaysian firm announced the introduction of their IP valuation software for ASEAN businesses of all sizes and sectors. It's being hailed as the first digital platform and software for valuing IP in ASEAN.?

By the end of 2023, the firm hopes to have raised US$1.788 million in a second round of fundraising. The company has plans to increase its footprint in the ASEAN area and develop its software and digital platform, which will include a gateway for IP tradings in the IP marketplace.?

Summing Up

Intellectual property (IP) value has never received the requisite amount of focus. One factor that impacts whether or not a firm succeeds is the degree to which it recognizes the importance of and makes use of, its intellectual property assets. Valuing an asset is a complex process that requires the input of trained professionals. Eqvista offers a premium service in valuing your company with the help of our trained professionals. If you need help, contact us today!