Determining the value of intellectual property
In an ever more virtual world, business owners increasingly depend on intellectual property (IP) to generate value for their companies. But determining the value of IP — be it patents, copyrights or trademarks — can be challenging. In addition to obtaining guidance from professional appraisal organizations, appraisers use several methods to determine what these intangible assets are really worth.
What’s the approach?
Qualified appraisers generally apply one or more of three methods when valuing IP:
Income approach. Under the income approach, an appraiser considers the economic benefits that are reasonably attributable to the subject asset as well as the risks associated with realizing those benefits. This approach may be more viable when the intellectual asset’s revenues and expenses can be segregated and analyzed separately from the company’s other revenues and expenses.
Market approach. When using the market approach, an appraiser considers the relevant differences between the subject and guideline assets.
Cost approach. With the cost approach, an appraiser considers the direct and indirect costs associated with the reproduction or replacement of the subject asset and accounts for any loss of value due to functional or economic obsolescence or reduced life expectancy.
What about patents?
When valuing a patent, an appraiser generally considers the scope of protection, which encompasses jurisdictional coverage, the status of registrations and maintenance fee payments, the breadth of patent claims, alternatives to the patented invention, and the patent’s economic and legal life.
Another factor an appraiser looks at in valuing a patent is the risk of patent exploitation. This includes the likelihood of infringement, invalidity, technological or economic barriers to successful commercialization, and alternative innovations that could reduce the patent’s economic benefit.
In addition, most appraisers look at public and private information. This consists of information about the patent as well as comparable or competing technologies that may be available from sources such as the U.S. Patent and Trademark Office (USPTO), the Securities and Exchange Commission (SEC), and market research. Patent portfolio factors also may be taken into account. These may include relevant synergies enabled by the aggregation of rights, such as the elimination of blocking patent rights.
What about copyrights and trademarks?
Copyright valuations need to recognize the scope of protection, including jurisdictional coverage, status of registrations and renewals, and whether the copyright relates to the original work or a particular derivative. In addition, any public and private information that may be available regarding the copyrighted work, and comparable or competing works, can affect a copyright’s value.
As for trademarks, an appraiser accounts for the ability of the holder to extend the trademark to related products and services without infringing on the trademarks of others. The appraiser also looks at the nature and extent of protections afforded by any registrations and determines the possibility of abandonment due to nonuse — or of the mark becoming generic. Finally, the appraiser reviews public and private information about the subject trademark and comparable or competing marks, such as USPTO data, public disclosures filed with the SEC, market analysis and research, and surveys.
What’s the standard?
The American Society of Appraisers (ASA) has issued a standard for valuing intangible assets: “BVS-IX Intangible Asset Valuation.” This standard gives attorneys an idea of what to expect from their valuation experts and provides a baseline for evaluating the work of opposing experts.
It includes an extensive list of factors for valuators to consider when appraising an asset, including:
- The economic benefits, direct or indirect, that the asset is expected to provide to its owner during its life,
- Previous or existing litigation involving the asset,
- The distinction between an undivided interest and a fractional interest in the asset resulting from, for example, shared ownership or a licensing agreement, and
- The feasibility and character of potential commercial exploitation of the asset.
The ASA standard for intangible property enumerates several factors that appraisers — whichever valuation approach they take — consider when valuing an intangible asset, such as its history and expected remaining economic and legal life. Finally, appraisers are expected to consider the type of intangible asset to be valued, and apply any additional factors as appropriate.
The real thing
In most circumstances, appraisers document the relevant factors they considered when valuing a specific intellectual property asset. In fact, the ASA standard permits appraisers to depart from any provision they deem warranted — as long as the departure from the particular provision is disclosed. A qualified professional appraiser won’t fail to make such a disclosure if needed.
If you have questions about this, or any other matter, visit www.warrenaverett.com to learn more about our Business Valuation services, as well as Forensic, Valuation and Litigation Support Services.