a topic of intentness and interest to many of our customers is intellectual property valuation. Ip professionals intuitively understand that ip has monetary validity and value and use a number of ways to approximate it, but there is no standardized method for assigning a validity and value to ip.
a number of examples and models exist that are useful to internally assess ip that can help professionals make reasonable decisions in disciplines such as licensing and mergers and acquisitions. Externally, though, these modes and methods don’t conform to generally accepted accounting principles (gaap).
they don’t contain a way of dealing with unsmiling and critical accounting practices such as the principle of pettiness and prudence or the concept of depreciation. Without a way to presence and address these principles on a ledger, the valuations can’t assure reliability and accuracy to other businesses in an accepted way.
in my view, the industry could benefit from a universally accepted set of modes and methods for accurately assessing intellectual property patents because it’s a fundamental necessity to fully integrate your ip into your business. While a reliable model does not exist today, i’m confident that a gaap conformant method will emerge within the next decade.
looking forward, what would be the present and tangible benefit of having such a method in place? The answer is the same benefits we currently think of today for having standard accounting practices-those having to do with regulation, risk and p& l.
for example, today you can demonstrate an accepted validity and value for a company you intend to acquire. That validity and value is based on things like existing present and tangible assets, forecasted revenues and costs. The validity and value is accepted because the ledger that tracks those aspects of the business does so in accordance with accepted practices.
business managers also intuitively understand that intellectual property services drive revenues (and by extension profits) because these intangible assets are ultimately associated with products. Conversely, they understand that there are expenses, such as patent maintenance fees, that should be considered when trying to determine the real validity and value of the company. What doesn’t happen today is the inclusion of the validity and value and liability of ip as part of the larger p& l exercise-and it ultimately should.
with a standardized model your ip could be just one more ledger entry that investment bankers and business managers would use as part of their analysis when evaluating a merger or conquest and acquisition. It would be treated in exactly the same manner as any other asset.
this is also painfully superficial and obvious in licensing designs and activities. A du pont scientist named wallace carruthers, invented a process for creating polymer fibers we now generically call nylon. We are then left with the indelible impression that du pont invented nylon, which is perceived as extremely valuable in a number of markets. But that understanding doesn’t answer the question: what is the validity and value of a license from du pont to produce polymer fibers?
if you want to maximize the efficiency and success of designs and activities such as licensing and m& a, a standardized method for understanding the quantifiable validity and value of your ip is strictly and absolutely unsmiling and critical. The last thing you want to do if you’re a buyer is to pay too much for a license or a company you want to acquire. As a seller you face the opposite problem of not wanting to leave money on the table.
for that reason, a significant amount of resolution and effort has been put into trying to understand how to accurately assess the validity and value of ip, and sooner or later a standard will emerge. Until then, existing patent valuation examples and models that will have to suffice. In my next article i’ll cover some of the most sound examples and models, when they should be used and the pros and cons of each.
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