Valuation of Intellectual Property Assets: Myths and Realities

The valuation of Intellectual Property (IP) is a significant source of wealth for many industries today. However, one may ask the question if the worth of non-tangible assets can truly be ascertained. In Nigeria, valuers are proficient in the valuation of tangible assets such as real estate, equipment and facilities compared to intellectual properties such as copyrights, trademarks, patents and other non-tangible assets.

Intangible assets such as Intellectual Property rights are non-physical assets which is a departure from the common physical assets easily measured and assessed. The dynamic business environment makes the role of intellectual property in our today’s world increasingly necessary and important. For one to be able to maximise an IP asset, value must accrue to such asset to enable purchasing, licensing and entering into contracts on it. The valuation is also useful in the enforcement of intellectual property rights and other financial processes.

With the economic benefits placed on IP assets, this article seeks to analyse the valuation of intellectual property rights and addresses general myths about the process of valuation, presenting the reality for one to understand the reason for the value placed on each IP asset.

UNDERSTANDING INTELLECTUAL PROPERTY AS AN ASSET

Intellectual property assets are part of the non-physical property of a business[1]. According to World Intellectual Property Organization[2], “Intellectual property refers to creations of the mind such as inventions; literary and artistic works; designs and symbols, names and images used in commerce”. Intellectual property includes copyright, patents, trademarks, geographical indications, industrial designs and trade secrets. They are mostly a creation of law and therefore protected by law making IP enforceable in a Court of law. Even so, not all legal systems recognize or safeguard these rights to the same extent.

Competitive intangibles like know-how and human capital are examples of other types of intangible assets. Intangible assets of all kinds may be protected to some extent by legal processes such as contracts, albeit contracts may only protect two parties rather than the entire world. Intangible assets are sometimes classified under categories such as marketing, customer, technology and contract-related.

Intellectual property rights also have an economic lifespan depending on the viability of the asset. They are also independently identifiable and transferable.

In understanding Intellectual property, the various types of intellectual Property are explained as follows;

1) Copyright: This is a legal term used to describe the rights that creators have over their literary and artistic works. It varies from books, music, drawings, paintings, sculpture and films, to computer programs, databases, advertisements, maps and technical drawings.

2) Patents: This is an exclusive right given to an inventor. The aim of such protection is that the inventor determines how the inventions are used by external individuals. Patents are usually granted for a limited period.

3) Trademark: This is exclusive to a name, logo or sign that is particular to its source. The aim is that no similar trademark of a person is used by another, in order to avoid confusion in trade.

4) Industrial designs: Industrial design is an aspect of Intellectual property (“IP”) that focuses on the appearance of a product, resulting from features such as the lines or colours of the product or its ornamentation[3]. An industrial design may consist of 3-dimensional features such as the shape of a product (a Coca-Cola bottle) or two-dimensional features such as patterns (a design on a clothing), lines or colour of a product; It may even consist of a combination of features[4].

5) Geographical Indications: They are signs and indications used on goods and products that originate from a specific territory, origin and place. They are easily identifiable as particular to a country and region.

Generally, Intellectual Property are intangible assets that have rights attached to it which can be valued to determine its economic value. When the value of an IP is known, it can be used in securing finances, attracting business partners, obtaining licenses and also adopting the best strategy in settlement of disputes.

VALUATION OF INTELLECTUAL PROPERTY

IP valuation is the process deployed to determine the monetary value of IP assets. The capacity to exclude competitors from a market contributes significantly to the value of an IP asset. The legal rights attached to an IP grants an IP owner exclusivity. However, the economic right grants the ability to control the use of the IP.

They are standards to quantify and appraise IP assets, for an IP asset to have a quantifiable value[5], it should;

– Generate a measurable amount of economic benefit to its owner/user.

– Enhance the value of other assets with which it is associated.

An IP asset must be separately identifiable to be able to carry out valuation on the IP. In the valuation of Intellectual Property, there are some prerequisites for undertaking IP valuation, and such prerequisites include[6]:

1. The IP asset must be subject to specific identification and a recognizable description.

2. There should be some tangible evidence or manifestation of the existence of the IP asset (e.g., a contract, license, a registration document, a computer diskette, a set of procedural documentation, a listing of customers, recorded on a set of financial statements, etc.)

3. It should have been created or have come into existence at an identifiable time (or time period) or as the result of an identifiable event.

4. It should be capable of being legally enforced and legally transferred.

5. It should be capable of having its income stream separately, identifiable and isolated from the contribution of other assets employed in the business.

6. It should be capable of being sold, without selling the other business assets of the enterprise to the same buyer. It should be subject to being destroyed or to a termination of existence at an identifiable time (or time period), or as the result of an identifiable.

7. It must help to create, maintain or increase cash flow.

8. Its ownership must be defined and exclusive.

It is also noteworthy that various factors such as the purpose for valuation, the date of valuation, the valuation method employed, the cost of valuation, etc influence the valuation of intellectual property. However, these factors are not exhaustive.

IP VALUATION METHODS

IP valuation also requires the appropriate tools to capture the true value of an IP asset. These methodological approaches discussed focus on the economic value of an IP rather than the strength or the use of the IP. The methods are quantitative rather than qualitative. They include;

  • The Income Method: This method is based on the expected future income the IP is to generate. Using the income-based method, the IP’s worth is determined by the potential future benefits less the appropriate discount factors to determine its present value in the economy[7].
  • The Cost Method: it is based on the economic principle that there is a direct relationship between the cost expended in the production of the IP and the economic value. This method values IP through the calculation of the cost incurred from developing a similar asset available in the market. it subjects the worth of an IP asset to the cost of its development and no more. This method does not weigh other unique features of the IP in constituting the cost.
  • The Market Method: This method is based on comparisons with similar transactions available in the market between independent parties. The price in the market decides the value and worth of an IP. This method will be possible where there is an existing comparable transaction in the market.

There is also the Option pricing method which develops the income-based methods by making flexible the calculation process. In this method, the IP generated alongside the Research and Development process, is treated as an “option” that can be bought or sold at different stages of development. This method has a great advantage as it allows risk factors to be captured.

VALUATION OF INTELLECTUAL PROPERTY ASSETS; MYTHS AND REALITIES

A common myth regarding IP valuation is that the market value of a company is a determinant for the valuation of an IP asset. In the real sense, this may only apply to IP that has an existing market. Items that are unique such as a Patent, most times are determined by the buyers. Such an asset may be worth more to one person when compared to another. This makes such valuation subjective to individuals.

The opinion that the valuation of IP assets cannot be credible and represent the true value of its worth because each is unique, is a fallacy. The reality is that measures are made readily available to determine the worth of every intangible asset.

Another myth is that regarding the valuation of a patent as an IP asset, once a Patent is obtained for an invention, it automatically excludes an individual from considering the Patents owned by another. This is a fallacy because a Patent basically prevents an owner from others using their invention without consent, but it does not avail the Patent owner to incorporate the works of others. This means that adequate research must be put in a place to know to what degree and extent other works have been valued. Also, the fact that technology is patented does not automatically mean commercial success.

There is the belief that one method and standard for the valuation of IP assets should be acknowledged, but having analyzed the various valuation methods above, it can be safely concluded that each method of valuation is still dependent on a number of other variations.

CONCLUSION

Intellectual property rights have strategic advantages afforded by their exclusivity. These advantages give room for value to be placed on them. The valuation of IP assets allow individuals and companies to know the true worth of such assets, as tangible assets alone do not reveal the true worth of a company or business.

However, in the valuation of an IP asset, businesses and firms that manage its intangible assets on the basis of myths, will be unable to maximize the true value of its worth. Companies ought to understand and engage the services of professionals to determine the true worth of their intangible assets. This will enable companies to make informed decisions about commercializing their intangible assets.

REFERENCE

  1. WIPO, ‘Valuing Intellectual Property Assets’ World Intellectual Property Organization’ WIPO Website <https://www.wipo.int/sme/en/value_ip_assets/#:~:text=The%20value%20of%20an%20IP,wh%20which%20it%20is%20associated.> Accessed on 19th March, 2022.
  2. WIPO, ‘Valuing Intellectual Property Assets’ World Intellectual Property Organization’ WIPO Website < https://www.wipo.int/about-ip/en/ > Accessed on 19th March, 2022
  3. Aderemilekun Olusoga, ‘Nigeria: Industrial Designs: Benefits Of Registration’ [2020]<https://www.mondaq.com/nigeria/trademark/912624/industrial-designs-benefits-ofregistration>Accessed on 19th March, 2022.
  4. Ibid, n. 4
  5. WIPO, ‘Module 11: IP Valuation’ <https://www.wipo.int/export/sites/www/sme/en/documents/pdf/ip_panorama_11_learning_points.pdf> Accessed on 20th march, 2022.
  6. WIPO, “Value, IP Assets” WIPO website < https://www.wipo.int/sme/en/value_ip_assets/> Accessed on 20th March, 2022.
  7. Olopade Israel Temitope, ‘An Assessment of Intellectual Property Valuation Practice in Lagos, Nigeria’ [2018], in partial fulfillment of the requirements for the award of B.tech Degree in Estate Management to the Department of Estate Management School of Environmental Technology Federal University of Technology, Akure Ondo State, Nigeria.

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