THE BUSINESS OF KNOWING
“If a man is keeping an idea to himself, and that idea is taken by stealth or trickery - I say it is stealing. But once a man has revealed his idea to others, it is no longer his alone. It belongs to the world.” ― Linda Sue Park, A Single Shard
Knowing - that’s what intellectual property (“IP”) is all about. IP, a term that gets a lot of play these days, refers to creations of the mind, manifested in software, books, inventions, designs of all kinds, plays, movies, and more. The owners of IP may be granted certain exclusive rights through patents, copyrights, trademarks and trade dress. IP is the primary component of many of the world’s largest corporations. Think of Microsoft, Apple, Amazon, Google, Facebook, and so on. The value of these companies in not based on income generated by machinery and equipment and real estate; their value is based on income generated by what they know by their IP.
Intellectual property shares many of the characteristics associated with real and personal property. For example, IP is classified as an asset, which can be bought, sold, licensed, exchanged, or given away as any other asset can. IP owners are also capable of preventing the unauthorized use or sale of the property. The key difference here, however, is that intellectual property is intangible and cannot be defined by its own physical parameters. To be protectable and patentable, all intellectual property must be discernably expressed and the underlying innovation must be unique, practical, and nonobvious.
Valuation of IP can be challenging. A first step is to determine if the IP actually has value and gives some form of competitive advantage to its owner---an associated step is to determine what stage the asset is in its lifecycle (“remaining useful life”). Valuation methodologies are broadly categorized as aggregate or individual. The former include residual value (e.g. in a sale, this would be purchase price less the market value of tangible assets less intangible assets subject to amortization) and earnings-based approaches (e.g. excess earnings due to the IP or discounting earnings attributable to IP). Individual valuation methodologies include market approaches (e.g. analyzing past sales involving intangibles), income approaches (e.g. relief from royalty) and cost approaches (e.g. cost to replace IP).
Additionally, there are other important issues business owners must keep in mind in regards to intellectual property. These include:
Ensuring proper documentation of the IP, such as: patents, Confidentiality and Invention Assignment Agreements, liens or encumbrances on IP, contracts providing for indemnification of third parties, etc.
The judicious and careful incorporation of open source software – many software engineers and developers use open source software in their development of new products, which can lead to ownership, licensing, and compliance issues
Representations and warranties related to IP ownership – ensuring the sole and exclusive ownership of each item of IP, and that the IP is not subject to any encumbrances or limitations that will materially detract from its value
Disputes and infringements – conducting a thorough review of current or past IP litigation prior to purchasing IP
A few examples of IP-related projects that we have encountered at Private Valuations include:
Patents for ophthalmic diagnostic equipment; a medical device for pain relief; intraocular lenses (what you get implanted during cataract surgery); and ophthalmic surgical machines & disposables.
Copyrights for a popular cook book with international distribution; and a promotional video owned by a large real estate firm.
Trademarks and trade dress for a popular destination restaurant with a 75-year history; windows manufactured and sold in Australia; and a super-premium vodka distilled in Moscow and sold in the US.
Trade secrets - Some owners of IP find it more practical – and safer - to protect their IP by maintaining it as a trade secret or “unpatented know-how.”
More recently, PVI helped a global Software Asset Management (SAM) consulting firm value its proprietary enterprise software.