29 August 2019
In this post from Mathys & Squire Consulting, we explain the importance of businesses identifying and valuing their intangible assets and intellectual property (IP) in order to maximise profits.
The value of IP is the exclusive right it provides to prevent others using your technology without your expressed permission (through a licence for example) and the potential future profits it can protect. These days intangible assets, of which IP is a subset, are forming an increasingly large part of a business’s value. In previous years the vast amount of a company’s value lay in its tangible assets such as buildings, machinery, equipment, etc. However, nowadays and with the ever-increasing number of new software-based companies covering a variety of sectors, the value of many companies may be comprised of up to 80% or 90% intangible assets. This is especially evident in the software sector, where early stage companies require little more than a few computers and don’t have the overheads of office space or equipment previously required by many businesses. The development and licensing of IP assets may be a successful business in itself, for example ARM Holdings, a Cambridge-based British semiconductor and software design company, which licences its IP to tech giants such as Apple and Samsung, was acquired by Softbank in 2016 for £24 billion.
Even within intangible assets there may be a split between disclosed intangible assets, which are often legally registered and enforceable rights such as patents, trade marks, and design rights – or undisclosed intangible assets, which may include trade secrets, proprietary know-how and processes developed within the company, brand recognition, supplier or client agreements and contracts or business relationships. Depending on the business and industry, these intangible assets may be just as pivotal in ensuring business profitability as disclosed tangible assets.
This brings us to the importance of correctly identifying and valuing your intangible assets. If these intangible assets, either disclosed or undisclosed, are so important to the development of the business and in ensuring business profitability, companies need to know the value of and leverage these assets wherever possible. Businesses of all sizes across all industries should seek to identify and value their IP for a variety of reasons, including:
The list above is an overview of the main uses for a valuation of intangible or IP assets, but there are many other situations in which it may also be prudent to have an indication of asset value prior to entering into any negotiations.
Before undertaking an intangible asset or IP valuation, there are a number of points that should be addressed:
The above and many other factors must be considered when valuing IP before coming to a fair market value of the IP. In all cases, the value ascribed to the IP is valid at that point in time and based on the information provided at that time. For example, the value of a patent today may change significantly if the technology it protected becomes obsolete tomorrow. The above considerations will also have an impact on the approach used in valuation of the IP.
For earlier stage or pre-revenue companies, a cost approach may be chosen. This looks at the cost of developing the technology or a similar technology. While this offers a useful benchmark, it does not always offer a true indication of the potential of, and potential value of, that IP.
The most frequently used and often most reliable method of valuing intangible assets is a future income-based approach, which takes the potential future earnings based on the IP of interest and brings them to their current value, using net present value (NPV) calculations through the use of a discount factor (DCF), while also allowing for risks in the market, etc. This provides a range of values of the IP based on the projected future revenues.
There are a number of important factors which come to light when determining the value of a company’s intangible assets, including:
In summary, as the global economy evolves and becomes ever more reliant on intangible assets, it is essential that businesses undertake IP auditing exercises to fully understand the intangible/IP assets they possess and how to fully utilise these assets to maximise profitability. These audits, further supported by robust IP valuations, help businesses make more informed commercial decisions and assist in business negotiations.
If your business needs assistance in identifying its intangible assets and gaining an understanding of their current value, please contact Mathys & Squire Consulting.
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