09 November 2021

IP valuation: key considerations to strengthen business transactions

Thanks to technological advancements and innovation driving change at an increasing rate, business owners are realising that intangible assets and registered rights such as intellectual property (IP) contribute significantly to overall business value. This has therefore sparked the need to understand the value of IP, but – as with all intangible assets – can often be challenging. Mathys & Squire Consulting provides clients with insights into the IP valuation process and a clear understanding of the components of value, as outlined below. Although the valuing of IP can be complex, it is an essential stage to prioritise before engaging in any IP transactions. 

A crucial consideration in IP valuation is to understand your business model and to evaluate whether it is most likely to lead to a transaction within reasonable timescales, with a party that has a key position in a strong value chain. It can often be the case that several business model alternatives exist, and numerous factors need to be reviewed to determine the optimum approach to take when valuing IP.

Another aspect to consider is awareness of the assets’ ownership within the value chain (i.e. owned by the customer or sub-contractor). At every step of the value chain, the value of an intangible asset tends to increase, and thus transactions at different levels can yield significantly differing results – both in terms of the level of success of the transaction itself and the ultimate financial outcome.

A further consideration is the reason behind IP valuation in the first place, which could be for the purpose of mergers and acquisitions; securing more funding and investments; asset transfers; infringement-related damage evaluation; or insolvency. All these scenarios call for an IP valuation, but it is likely they will be approached differently. It is therefore crucial to understand the reason for valuation, as it will help determine the most suitable calculation method. Certain circumstances may require a more pragmatic approach than others, and IP valuation should cater to all cases, with the overriding consideration that the IP valuation model is designed to support transaction negotiations.

The flexibility built into the IP valuation process can provide a portfolio’s value at a particular time and market strength. The value of intangible assets and an IP portfolio can fluctuate significantly given changes to the state of the economy, industry trends and market competitiveness. Such valuation should be updated as the business expands or any external changes occur, which could inflate or devalue the asset value.

The industry in which your business operates also has a significant impact on asset valuation. Different industries have varied product development turnaround time, with some being able to market an invention or technology in less than two years, while others may take 15 years to do so. This can directly influence the value of assets in terms of the time to market and market growth. Certain markets also have regulations and de facto standards that businesses must comply with to enter the market.  For any new invention, the valuation model needs to take account of ongoing investment required to demonstrate regulatory compliance.

The market context and purpose of intangible asset and IP valuation are key factors in establishing a negotiation position, leading to a successful transaction. Mathys & Squire Consulting has developed a methodology that can be used to enable clients to understand where the key value drivers are within a transaction, which leads to meaningful and efficient negotiations.