Intellectual Property Valuation
Value creation and growth is the ultimate goal of any management team. To measure the management performance, valuation of intellectual property at regular intervals becomes imperative, more so, when often more than 50% of capitalization of corporates lies in Intellectual Properties. If you do not know the value, not only would you loose the ability to commercialize it fully, you also wouldn't be able to initiate legal course, to recover the correct damages in case of theft, infringement and dilution. Therefore, a clear understanding on IP Valuation is imperative to monitor protection and growth. Intellectual Property and Intangible Assets continue to drive the world business and their importance is going to exponentially grow in time to come. Intellectual Property is an integral part of the business concept and is best understood and utilized with in that context. In very real sense I strongly believe, intellectual property can no more be considered as intangible but are tangible assets, conferring rights to owner of such property that are both de-jure and de facto. Many of the new generation corporations have invested billions of rupees not in land and machinery but in intellectual capital. At the same time value creation and its growth are the ultimate goal of a management team; therefore the management performance can only be measured through the valuation of intellectual property at regular intervals, which becomes imperative. In the recent past valuation of intangible assets related to intellectual property has gained a considerable importance. Valuation of individual intangible assets is a recent concept in India, though the generic intangible assets better known, as Goodwill has been valued for a very long time. Goodwill is an umbrella concept. The Goodwill was valued when ever a business as a whole was transferred from one entity to another or when new partners were brought in or old partners left the business to give them their dues as part of their contribution to the business. Intellectual Property can be clearly distinguished from goodwill. UK & Australian Generally Accepted Accounting Principles (GAAP) has specified goodwill as an umbrella concept consisting of unidentifiable intangible assets and should not include those Intellectual Properties which are capable of individual identification and can be sold separately. Today intellectual property age is on us, although the new paradigm is yet to be played fully, however the trends are clear. Just as the idle floor of the corporate building is leased to others, Intellectual Property is also being exploited in the same fashion. Idle assets are no good business you must use it or rent it and if you don’t need it for longer or for ever then lease it or sell it. The recent concept of valuation of intangible assets related to Intellectual Property like Patents, Copy rights, Design, Trademarks, Brands etc, is also getting greater importance as these Intellectual Properties of the business is now often sold and purchased in the market by itself, like any other tangible asset. Intellectual Property is often used as stand alone tangible assets, whereas they could be at the same time more useful in large networking. McDonald’s for instance developed its own software for its cash register and order-tracking and other systems. In 2001 the company launched e-mac digital to sell software and services to the global restaurant industry. However the commercialization of Intellectual Property often involves non-core activities and is rarely anyone’s top priority, they will often die without commercialization if not supported at the highest level, therefore one must understand that the un-commercialized intellectual property is a wasted corporate asset, which otherwise could serve as spark plug to give robust start and boost the value of other tangible assets. All large companies possess enough intellectual property to bring some of it to market and could generate large operating incomes from Licensing and franchising. Companies need to change the way they manage their intellectual properties. Companies need to outsource and look outside to find the experts who can identify market application for Intellectual assets and convert these ideas into revenue. How does one go about valuing the Intellectual Property? The choice of approach will be determined primarily by the type of Intellectual Property asset is to be valued, the circumstances of the specific transaction, the availability of information and the level of due diligence that the corporate is willing to take on. When multiple approaches are applied a comparison and reconciliation of resulting value is possible. There are four principle approaches, which are often used for valuation of Intellectual Property they are: a) Cost Approach b) Market Approach c) Income Approach d) Black-Scholes Valuation Approach Cost Approach It is important to remember that cost does not equal value. Cost approach does not directly consider the amount of economic benefit that is attached to the intellectual property. It is inherent assumption with this approach that the economic benefit indeed exist and are justified enough to develop the intellectual property. Therefore the cost incurred to develop the intellectual property is summed up proportionately over the period of time directly related to intellectual property. The general principle governing the cost approach is the principle of substitute, which states that one would not pay more for the property than its cost to create it. The cost approach is very useful as valuation method for Intellectual Property such as Computer software, R& D programme. Such approach is often found in Govt. department e. g. Say the cost of development of Light Combat Aircraft (LCA) by HAL will be directly debited to the Air Force, if the Aircraft is developed on the specific need of the IAF. Similarly the innovation developed by the Govt. Research Establishments is charged to the users on cost basis. It is often used when other valuation method are not applicable. We must understand that the cost is not the same as value; so the starting point in using cost approach in IP is to obtain the estimate of the cost to produce a new replica of Intellectual Property, therefore the approach is not very relevant to brand valuation, however this would certainly help in evaluating as to how well the resources spent on brand building have been blended when its market value is determined by other methods. Historical cost: That is the proportionate of Historical Cost (in the form of depreciation) on the basis of original cost. Brand Value based on historical cost is the aggregate cost of proportionate historical cost of fixed asset consumed and all marketing, advertising and R& D expenditure incurred over a period of time on a brand. Replacement cost: The cost based on replacement cost for the utilization of proportionate fixed assets could be quite subjective Fair market value: The cost can also be based on proportionate of fair market value of the fixed cost consumed. In other words the Historical cost, Replacement cost or Fair market value is only relevant for charging proportionate of fixed assets used for the development of new intellectual property, these factors are not relevant when it is applied to direct cost element. Direct cost is always based on actual expenditure like the cost incurred for the payment of salary and wages. Market Approach The market approach provides an indication of value by comparing the price at which similar intellectual property has been exchanged between willing buyer and seller. There are various elements of comparison, which should be given due importance while analyzing and comparing the transactions such as, functional characteristics of intellectual property, physical characteristics of intellectual property, the size of industry in which the intellectual property is transferred, the economic condition, the existence of any special term and the legal rights that have been transferred. In brand transfer such approach is not readily suited as it is not the sale of tangible assets being undertaken through the market dealer and also the two brands cannot be the same, which can be easily compared, and there is significant difference in the manner in which the brand asset is exploited. The second method of market approach is the market valuation through capital market. Say hypothetically that a company is operating in commercial vehicle and has the consistent market capitalization at Rs. 500 Crores. It has purchased a new brand which has been successfully put into use, and this new brand has given an increase in market capitalization to Rs. 600 Crores. We can with reservation say that the new brand is worth Rs. 100 Crores but one has to understand the various other influencing factors in the real market scenario. Therefore the market approach is not without the limitation and often not used. The other method of market approach is valued by comparison with the sale value of similar assets. A multiplier can be determined based on sale or EBITDA on which a comparison could be made and then the multiplier can be used as guidelines for determining the brand value. This method is more reliable in market approach. Market Approach The value of brand can be expressed as the present value of the future stream of economic benefits that can be derived from its commercialization. There are numbers of factors, which are fundamental to this approach, which are: What amount of economic benefit can be expected? How long can it be expected to continue? What are the costs directly associated with the return? What risk is involved with achieving the anticipated benefits? What is the discount rate applicable to such investments? The most vital factor in determining the value of a brand is its profitability or potential profitability over period of time. The profit must be fully absorbed profit of the brand. Tax deduction and financial cost is matter of perception. Some establishments in the field of valuation don’t but I strongly feel that financial cost must be charged. Where as tax is a matter of various positional factors, hence should not affect the brand value.

Intellectual Property Valuation

Value creation and growth is the ultimate goal of any management team. To measure the management performance, valuation of intellectual property at regular intervals becomes imperative, more so, when often more than 50% of capitalization of corporates lies in Intellectual Properties. If you do not know the value, not only would you loose the ability to commercialize it fully, you also wouldn't be able to initiate legal course, to recover the correct damages in case of theft, infringement and dilution. Therefore, a clear understanding on IP Valuation is imperative to monitor protection and growth.

Intellectual Property and Intangible Assets continue to drive the world business and their importance is going to exponentially grow in time to come. Intellectual Property is an integral part of the business concept and is best understood and utilized with in that context. In very real sense I strongly believe, intellectual property can no more be considered as intangible but are tangible assets, conferring rights to owner of such property that are both de-jure and de facto. Many of the new generation corporations have invested billions of rupees not in land and machinery but in intellectual capital. At the same time value creation and its growth are the ultimate goal of a management team; therefore the management performance can only be measured through the valuation of intellectual property at regular intervals, which becomes imperative. In the recent past valuation of intangible assets related to intellectual property has gained a considerable importance. Valuation of individual intangible assets is a recent concept in India, though the generic intangible assets better known, as Goodwill has been valued for a very long time. Goodwill is an umbrella concept. The Goodwill was valued when ever a business as a whole was transferred from one entity to another or when new partners were brought in or old partners left the business to give them their dues as part of their contribution to the business. Intellectual Property can be clearly distinguished from goodwill. UK & Australian Generally Accepted Accounting Principles (GAAP) has specified goodwill as an umbrella concept consisting of unidentifiable intangible assets and should not include those Intellectual Properties which are capable of individual identification and can be sold separately.

Today intellectual property age is on us, although the new paradigm is yet to be played fully, however the trends are clear. Just as the idle floor of the corporate building is leased to others, Intellectual Property is also being exploited in the same fashion. Idle assets are no good business you must use it or rent it and if you don’t need it for longer or for ever then lease it or sell it. The recent concept of valuation of intangible assets related to Intellectual Property like Patents, Copy rights, Design, Trademarks, Brands etc, is also getting greater importance as these Intellectual Properties of the business is now often sold and purchased in the market by itself, like any other tangible asset.

Intellectual Property is often used as stand alone tangible assets, whereas they could be at the same time more useful in large networking. McDonald’s for instance developed its own software for its cash register and order-tracking and other systems. In 2001 the company launched e-mac digital to sell software and services to the global restaurant industry. However the commercialization of Intellectual Property often involves non-core activities and is rarely anyone’s top priority, they will often die without commercialization if not supported at the highest level, therefore one must understand that the un-commercialized intellectual property is a wasted corporate asset, which otherwise could serve as spark plug to give robust start and boost the value of other tangible assets. All large companies possess enough intellectual property to bring some of it to market and could generate large operating incomes from Licensing and franchising. Companies need to change the way they manage their intellectual properties. Companies need to outsource and look outside to find the experts who can identify market application for Intellectual assets and convert these ideas into revenue.

How does one go about valuing the Intellectual Property?

The choice of approach will be determined primarily by the type of Intellectual Property asset is to be valued, the circumstances of the specific transaction, the availability of information and the level of due diligence that the corporate is willing to take on. When multiple approaches are applied a comparison and reconciliation of resulting value is possible. There are four principle approaches, which are often used for valuation of Intellectual Property they are:
a) Cost Approach
b) Market Approach
c) Income Approach
d) Black-Scholes Valuation Approach

Cost Approach
It is important to remember that cost does not equal value. Cost approach does not directly consider the amount of economic benefit that is attached to the intellectual property. It is inherent assumption with this approach that the economic benefit indeed exist and are justified enough to develop the intellectual property. Therefore the cost incurred to develop the intellectual property is summed up proportionately over the period of time directly related to intellectual property.
The general principle governing the cost approach is the principle of substitute, which states that one would not pay more for the property than its cost to create it. The cost approach is very useful as valuation method for Intellectual Property such as Computer software, R& D programme. Such approach is often found in Govt. department e. g. Say the cost of development of Light Combat Aircraft (LCA) by HAL will be directly debited to the Air Force, if the Aircraft is developed on the specific need of the IAF. Similarly the innovation developed by the Govt. Research Establishments is charged to the users on cost basis. It is often used when other valuation method are not applicable. We must understand that the cost is not the same as value; so the starting point in using cost approach in IP is to obtain the estimate of the cost to produce a new replica of Intellectual Property, therefore the approach is not very relevant to brand valuation, however this would certainly help in evaluating as to how well the resources spent on brand building have been blended when its market value is determined by other methods.
Historical cost: That is the proportionate of Historical Cost (in the form of depreciation) on the basis of original cost. Brand Value based on historical cost is the aggregate cost of proportionate historical cost of fixed asset consumed and all marketing, advertising and R& D expenditure incurred over a period of time on a brand.
Replacement cost: The cost based on replacement cost for the utilization of proportionate fixed assets could be quite subjective
Fair market value: The cost can also be based on proportionate of fair market value of the fixed cost consumed. In other words the Historical cost, Replacement cost or Fair market value is only relevant for charging proportionate of fixed assets used for the development of new intellectual property, these factors are not relevant when it is applied to direct cost element. Direct cost is always based on actual expenditure like the cost incurred for the payment of salary and wages.

Market Approach
The market approach provides an indication of value by comparing the price at which similar intellectual property has been exchanged between willing buyer and seller. There are various elements of comparison, which should be given due importance while analyzing and comparing the transactions such as, functional characteristics of intellectual property, physical characteristics of intellectual property, the size of industry in which the intellectual property is transferred, the economic condition, the existence of any special term and the legal rights that have been transferred. In brand transfer such approach is not readily suited as it is not the sale of tangible assets being undertaken through the market dealer and also the two brands cannot be the same, which can be easily compared, and there is significant difference in the manner in which the brand asset is exploited.
The second method of market approach is the market valuation through capital market. Say hypothetically that a company is operating in commercial vehicle and has the consistent market capitalization at Rs. 500 Crores. It has purchased a new brand which has been successfully put into use, and this new brand has given an increase in market capitalization to Rs. 600 Crores. We can with reservation say that the new brand is worth Rs. 100 Crores but one has to understand the various other influencing factors in the real market scenario. Therefore the market approach is not without the limitation and often not used.
The other method of market approach is valued by comparison with the sale value of similar assets. A multiplier can be determined based on sale or EBITDA on which a comparison could be made and then the multiplier can be used as guidelines for determining the brand value. This method is more reliable in market approach.

Market Approach The value of brand can be expressed as the present value of the future stream of economic benefits that can be derived from its commercialization. There are numbers of factors, which are fundamental to this approach, which are:

What amount of economic benefit can be expected?

How long can it be expected to continue?

What are the costs directly associated with the return?

What risk is involved with achieving the anticipated benefits?

What is the discount rate applicable to such investments?
The most vital factor in determining the value of a brand is its profitability or potential profitability over period of time. The profit must be fully absorbed profit of the brand. Tax deduction and financial cost is matter of perception. Some establishments in the field of valuation don’t but I strongly feel that financial cost must be charged. Where as tax is a matter of various positional factors, hence should not affect the brand value.