Intellectual property may be an intangible asset, but that doesn’t mean it can’t bring tangible returns. However, a report published by the UK Intellectual Property Office (UKIPO), has revealed that too few businesses are aware of the benefits that intellectual property (IP) valuation can bring. David Stears, a valuation specialist at accountancy firm, Menzies LLP, highlights some of the opportunities that can be unlocked.
The report highlights that while an estimated 70 per cent of a typical company’s worth lies in intangible assets, few firms know the value of their IP. Despite the low take-up of IP valuations, those companies that had commissioned an IP valuation found it to be beneficial, with 95% saying that other companies should do the same.
The value of an IP portfolio is assessed in three ways, all of which are cross referenced and considered in the final valuation. Firstly, there is the cost approach, which is an estimate of the monetary and temporal costs of replacing the asset. Secondly, the income approach is an assessment of the present value of the portfolio based on an appreciation of future income streams and taking account of any risks. Finally, the market approach sees an estimate drawn up based on comparative sales data.
Those businesses that do get valuations for their IP tend to do so for reactive reasons. For instance, when a company is involved in a sale or merger, it would typically get a valuation of any intangible assets acquired in order to comply with accounting standards. Similarly, a company may need to value its IP if it is involved in any litigation over rights of ownership. While these are important benefits, companies could be getting so much more out of their IP if they were to seek out valuations proactively.
There are a number of immediate opportunities which businesses could be looking to access now. For example, valuations can be particularly helpful if business needs debt finance to pursue its growth strategy. It is not widely known that many banks will accept the ownership of rights for demonstrably valuable IP as collateral on a loan and secured lending of this type is much cheaper to service than unsecured lending.
Getting IP valued can also be advantageous when considering licensing deals. If the business knows the value of specific software patent, for example, it can help them to decide on a pricing policy if they wish to license it to a third party. It can also make it easier to secure an appropriate fee when securing the deal.
Valuations can also be useful if the company is planning some corporate deal activity. If the business is planning to sell shares or the entire company for example, having a professional valuation of its IP portfolio will help to clarify the value of the company and its assets and expedite the way to a more equitable deal.
Comprehensively understanding the value of all assets – tangible and intangible – can help a business to achieve the best value for its activities and take informed business decisions. Armed with knowledge of their IP potential, companies can unlock a host of business opportunities.
To read the full report from UKIPO please click here.
David Stears is business valuations director at accountancy firm, Menzies LLP.