In the 1880s, Thomas Edison used his patent on an electric light bulb as a guarantee to raise capital and found General Electric. There is no doubt that patents are one of the most important sources of wealth today. So let’s talk for a moment about assets, especially intangible assets, that can provide long-term benefits to companies.
You may have seen some of these numbers in 2018, when the Aon and Ponemon Institute analyzed the value of the S&P 500’s intangible and intangible assets for nearly four and a half decades. Tangible assets, such as real estate and equipment, represent only 16% of a company’s value today, while intangible assets, such as intellectual property rights and reputation, account for 84%. In just 43 years, intangible assets have evolved from a complementary asset to an important factor for investors.
In recent years, patent-pending agreements have been negotiated through a variety of financial instruments, ranging from commercial banks to specialist market participants. While the demand for intangible securities may decline due to the narrow circle of buyers and sellers, the recent boom in intellectual property trading on the Internet is a promising indicator. It’s just about developing more interest and capacity to use IP resources to fund start-ups and expansion: opportunities are increasing dramatically, as are the cash flows generated by IP.
Impact of COVID-19
In recent weeks, if not more than a few months, many companies have experienced exciting business relationships with a permanent loss of income and sudden unexpected liquidity problems. It is likely that SMEs and small businesses will have much less liquidity reserves and access to credit limits, and it is clear that these companies will have to find a new way to generate short-term financing.
Understanding the true monetary value of your IP assets can help you use it as collateral for a loan and many other business decisions. For example, in the case of mergers and acquisitions (M&A) or joint ventures (JVs), understanding the fair market value of the portion of the technology you are buying is crucial. In addition, the targeted IP assets are placed under a magnifying glass during the assessment, revealing unknown investment opportunities, development opportunities and unknown risks.
Quantitative Evaluation Techniques
There are three most common and accepted quantitative valuation techniques: the cost method, the market method, and the income method. Everyone has strengths and weaknesses, which are more or less adapted to the specific circumstances of the work. Intangible development costs for assets are a cost-based valuation model. It measures the value of a property in relation to the cost of building or buying an asset. The cost-based model is usually retroactive and does not normally take into account the potential future economic benefits of the asset.
The appropriate method for quantitative evaluation is based, among other things, on an in-depth understanding of the context of the evaluation and the business environment under study.
The market valuation model estimates the value of PI’s assets based on a market picture, but the correct choice of a comparable intangible asset is an important issue. Income-based pricing models use expected future income to make an updated estimate of the value of assets. In this valuation model, the value of the intellectual property is primarily determined by the royalty proceeds in the licensed facility. These models have a forward-looking perspective and estimate future income from commercial use of intangible assets. When available, it is better to use factual data or historical results than rely on guesswork. Unfortunately, this is not always possible. However, it is possible to ensure that all assumptions are based on the financial, market, economic and competitive characteristics prevailing during the analysis period.
Context in the valuation
In addition to understanding the unique characteristics of the particular intellectual property, the selection of an appropriate methodology is based on a thorough understanding of the context of the assessment and the business environment under investigation. A good valuation analysis proposal can provide a calculated answer to any question regarding the value of intellectual property, or the amount of damage related to the infringement of the patent or the price charged to the patent, must be paid. Ultimately, in all cases, the most important thing is to assess the value of the context.