Intellectual Property Value – Do You Need Specialist Skills to Value IP?
As intellectual property (IP) becomes more recognised as an asset class, interest in it is increasing – so much so that apparently according to the IPKAT Hong Kong property surveyors have been trying to break into assessing the intellectual property value in a business.
They recently called upon overseas bodies (for example, the Royal Institution of Chartered Surveyors to promote the virtues of having surveyors perform IP valuations.
As the IPKAT says, the question is whether
- IP valuation is a sub-category of business valuations or a self-contained professional endeavor; and
- (ii) in either case, to what extent must an IP valuation professional understand the legal context of IP rights?
The starting point is to consider what we mean by IP
What is IP?
The term IP is generally associated with registrable rights like trademarks, patents and designs. However, SMEs also have many non registrable IP issues to consider, such as copyright, know how, trade secrets, database rights, organisational knowledge and more.
Unless an SME takes advice to identify, manage, and protect its IP assets it could be seriously exposed because intangibles are a poorly understood asset class.
There is no one size fits all when it comes to determining a business’s risks and opportunities. Even two businesses in the same industry, with similar business model, may have different issues to address depending on how they develop their businesses and what contracts and other arrangements they have in place, For one business copyright may be the critical asset, while for another it may be the database or a patent.
They will not necessarily be equally desirable to an investor as their value on exit would be impacted by a number of factors unique to each business.
Why have an IP valuation?
One issue a valuation will consider is whether there is key IP underpinning a company’s competitive advantage. If so, another question is whether that competitive advantage is adequately protected.
Banks and investors may accept IP assets as valuable security to finance an SME’s growth if the business can demonstrate that those IP assets underpin revenues and forecasts, and impact cash flow.
How the strength of the IP asset is critical
A fictional example may help convey how IP works.
Say a company has developed an innovative solution that becomes well known in its industry. That competitors will copy a good idea is inevitable. So, if a company’s asset isn’t protected with a patent or other barrier to entry, it is more vulnerable to copy cats.
However, where there are no patents to protect the product, it is a mistake to assume there is little you can do to prevent a competitor stealing market share. You may not be able to stop them creating similar products but you may be able to protect your competitive position and create barriers to entry through the name you choose for the product.
The name is a potential barrier to entry because it can stop competitors using similar ones to identify their offerings – but only if it is a name that the business can uniquely use.
If the business chooses a generic name (that is, one that describes what the product does, rather than an actual name), the name will not be capable of protecting the company’s asset. This is so even if the company registers that name as a trademark combined with a logo. Such a registration would effectively only protect the logo where the name is generic.
So the upshot is that the business has a product that gives it a competitive advantage. It has a valuable asset, but not as valuable as it would be if the name was capable of stopping competitors stealing market share when providing ‘me too’ solutions.
That not all names are equally effective at containing IP value is not generally well understood
Shifting value of IP
IP value is rarely static. Intellectual property rights can change in value over time for a variety of reasons. For example, when you first patent something, it’s possible you have a unique solution to a problem so that your patent provides a strong competitive advantage. But then as other solutions to the problem emerge, the value of your patent may be reduced. On the other hand, if you have successfully marketed your product, despite your patent becoming less critical to your competitive advantage, your trademark may have gained value as your name recognition has increased.
So, failing to give a product a distinctive name that is capable of functioning as a trademark, or not checking whether other people’s rights might prevent use of the chosen name long term impacts the value that is generated, and that would inevitably depress the value of your IP.
IP value is impacted by the choices you make
The above example is designed to illustrate how the IP in question, or the choices you make impact IP value. You need to be ready to make changes if needs be. However, names are not the sum total of IP. There are so many other issues that impact IP value.
There are a number of IP actions required in order to build value and wealth. Implementing effective contracts is a hugely important, but misunderstood aspect of IP protection.
Because it is never possible to foresee what problems and scenarios might arise for a business in the future, it is prudent to secure its IP rights to the fullest extent, so the business has adequate protection to protects its position in the market.
Therefore, identifying IP rights, and protecting and managing them, is essential for any ambitious business.
Conclusion
Clearly IP valuation is not an area in which surveyors would have appropriate transferable skills.
IP and business are closely intertwined. In practice, you need to take both into account. That is why it requires the combined skills of business and IP experts to get the most effective IP valuation and strategic advice.
In a future post, I will explore the different methods for valuing IP.
