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05 Jul 2021
BY Waldo Steyn AND Hugo Biermann

IP valuations – an essential piece of the IP puzzle

“…over the past half century, we have witnessed a somewhat silent revolution in terms of what factors are really driving business valuations... Earlier emphasis on physical property has shifted toward an era of intellectual property.” – Martin Jarzebowski (December, 2021)

 

IP CloseUP, in an article that appeared in January 2021, explains the increased importance of intangible assets as follows: 

“The value of intangibles like intellectual property rights associated with inventions and brands, customer data and software continue to grow, as businesses increasingly depend on technology and innovation to compete.”

Clearly, it’s critically important to understand the value of intangible assets in a business.  However, we sometimes hear that, because of their intangible nature, you can’t assign a monetary value to IP assets. But this isn’t correct.  IP clearly has a monetary value: it can be bought and sold like tangible assets, shared (think licensing and franchising), used as security in financing transactions, for legal and enforcement purposes, and organised within a group structure to facilitate business operations. To carry out these activities, it is important to know what the value of specific IP rights is. 

 

IP rights are given their monetary value through an IP valuation. Common reasons for conducting an IP valuation include:

  • raising capital
  • tax
  • exchange control
  • mergers, acquisitions and disposals
  • royalty rate determination for licensing
  • litigation and expert witness advisory work
  • brand management
  • strategic reasons, such as enhancing the “IP image” of your business
  • supporting R&D and IP protection and enforcement spend

 

But how does this work?  Typically, you must have regard for a notional arm's length transaction where there is a willing buyer and a willing seller.  To make them come to an agreement on this notional sale of the bundle of IP rights, you need to reach a valuation that is not only realistic, but where both parties can walk away from the negotiating table with a degree of satisfaction.  This means that the valuation can’t be too high (which would make it impossible for a notional purchaser) or too low (which would be to the disadvantage of the notional seller).

Different valuation methodologies can be used, but the three most widely known and accepted methods are the income method, the market method and the cost method.  The income method is generally preferred, and it values an IP asset on the basis of the economic value that the IP asset is expected to generate over its economically useful lifespan, adjusted to its present day value.

With intangible, and specifically IP, assets having become such an important asset class to businesses, IP assets cannot be managed generally, or in commercial transactions, in isolation.  As a result of the close collaboration between the different specialisation areas in ENSafrica, we bring together deep expertise in different fields to provide advice and support to our clients that deals with valuable IP assets in the commercial and legal context in which it drives value for our clients.  The critically important role of innovation and technology in today’s businesses means that there is some IP element at play in almost every commercial interaction that a business engages in. 

 

For assistance in getting your IP assets valuated, please contact:

Waldo Steyn

IP | Executive

wsteyn@ENSafrica.com

+27 82 382 6404

 

Hugo Biermann

IP | Certified Patent Valuation Analyst | Senior Associate

hbiermann@ENSafrica.com

+27 81 482 3447