Summary
This post analyses the growing importance of IP valuation among Indian companies and the complexities involved in assessing the monetary value of intellectual property. It outlines traditional and evolving methods such as cost, income, market, and real options for valuing IP, highlighting the challenges due to the intangible nature of these assets. The author explains that the method chosen depends on the specific purpose, such as licensing, mergers, acquisitions, litigation, or investments. The post emphasises that multiple valuation techniques may be used to achieve accurate results. Future blog entries will provide contextual examples for each circumstance.
Original Date of Publication: September 6th, 2010
Unlike five years ago, many Indian companies in today believe that Intellectual Property (IP) adds value to their business interests. They have been aggressively protecting their IP and are asking what their IP is worth. They are not content with the answer of attorneys that revolves around exclusivity, competitive advantage, market share, price margins and so on. Companies would like to know if their IP really has value in terms of money.
Determining the value of IP in terms of money is called IP Valuation. Valuation of IP is very tricky due to the uncertainities inherent in the process of performing valuation. Unlike real property, IP is intangible and therefore, its valuation is quite complicated. Traditional methods such as cost, income, market, Discounted Cash Flow and so on have been used for valuing IP and new methods such as competitive advantage, real options and so on are evolving. Determining the appropriate method for a transaction is challenging and generally, more than one method is adopted to arrive at a value.
Method of valuation varies based on the purpose of valuation. Some of the common circumstances for valuation are:
Assignment or Licensing;
Merger or Acquisition;
Litigation;
Investment;
Financial statements; and so on.
Merger or Acquisition;
Litigation;
Investment;
Financial statements; and so on.
Each of the circumstances is unique and a different valuation method may have to be used based on the situation or transaction at hand. The blogs that follow will put the circumstances in context with the help of examples.
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