A topic of interest to many of our customers is intellectual property valuation. IP professionals intuitively understand that IP has monetary value and use a number of ways to approximate it, but there is no standardized method for assigning a value to IP.

A number of 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 methods don’t conform to Generally Accepted Accounting Principles (GAAP).

They don’t contain a way of dealing with critical accounting practices such as the principle of prudence or the concept of depreciation. Without a way to 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 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 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 value for a company you intend to acquire. That value is based on things like existing tangible assets, forecasted revenues and costs. The 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 value of the company. What doesn’t happen today is the inclusion of the 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 acquisition. It would be treated in exactly the same manner as any other asset.

This is also painfully obvious in licensing 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 value of a license from Du Pont to produce polymer fibers?

If you want to maximize the success of activities such as licensing and M&A, a standardized method for understanding the quantifiable value of your IP is absolutely 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 effort has been put into trying to understand how to accurately assess the value of IP, and sooner or later a standard will emerge. Until then, existing patent valuation models that will have to suffice. In my next article I’ll cover some of the most sound models, when they should be used and the pros and cons of each.

Innography’s intellectual property management business intelligence, and patent software solutions enables organizations of all sizes and industries to benefit from rapid results and cost savings to manage protect and exploit their patent portfolios.

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