IP Valuation in India, Valuation of Intellectual Assets, Why is Valuation Important for a Business

1. IP Valuation
This article is in continuation of my Previous article What is Brand Value and How to enhance it
available at https://www.linkedin.com/pulse/what-brand-value-how-can-one-enhance-advocate-
shubham-borkar/.
The resources of a business such as technology, copyright, trademark and other IP are the
building blocks of Brand Value. Knowledge of the value contribution of these resources and the
linkages between them is essential for business strategy, IP management and IP valuation. In the
era of stiff competition amongst brands, the competitive advantage attributes to the development,
integration and reconfiguration of intangible resources. Yet, very few companies have the
knowledge of potential of value contribution of their IP assets. The prime reason firms acquire
intellectual property is not for litigation purposes, but to have legal and transferable proof of
ownership to some of their most important intangible assets. Intellectual Property valuation can
help you determine the true value of your business and capitalize on assets that you may not have
been aware of possessing. It is estimated that approximately two-thirds of businesses in the
United States have intangible assets that are potentially eligible for Intellectual Property
protections and the advantages they entail.
There is seldom a non linear relationship between the cost of creating IP and its value. It
possesses high risk of wasted investment but it can be counter balanced by the high potential that
IP assets hold if they are commercialized. A brand is sometimes used in reference of trademarks
and associated goodwill or designs, formulae and copyright. At times it is treated as a combined
business unit comprising of both- tangible and intangible assets. Ultimately, Wealth is the sum of
working capital, fixed capital and intangible assets.
How can we derive Wealth out of IP?
Value from an IP asset is derived through direct exploitation like sale and licensing of the IP or
even by not exploiting an IP asset (i.e., by merely owning it), for example, by minimizing the
negotiating power of customers, offsetting supplier power, mitigating rivalry, raising barriers to
entry by competitors, reducing the threat of substitutes, etc.

2. Factors influencing IP Valuation
1. Standard of value- The most commonly used standards of value are Fair market value and
Fair Price Value. It is important when undertaking an IP valuation exercise. Fair market
value (Market value) can be defined as the price at which an asset or service passes from a
willing seller to a willing buyer. It is assumed that both buyer and seller are rational and have
a reasonable knowledge of relevant facts. Fair value (Fair price) is seen as appropriate for use
in post transaction purchase price allocation. It is based on the assumptions that market
participants would use when pricing the asset. Whereas fair market value is seems to be more
appropriate when used in the premise of value in exchange, fair value is often based on
premise of value in-use. As mentioned earlier. in common situation, IP valuation is a process
to evaluate the fair market value of an IP asset.
2. Purpose of valuation - In order to determine the premise for calculation of value, it is
necessary to understand the purpose for valuation. For instance, valuation from the
perspective of market value and investment would be completely different. In commercial
situations, market value is the appropriate premise. International Value Standards define
market value as “The estimated amount which a property should exchange on the date of
valuation between a willing buyer and a willing seller in an arm’s‐ length transaction after
proper marketing wherein the parties had each acted knowledgeably, prudently, and without
compulsion.”1
3. Valuation method(s) – The methodology applied and assumptions made while applying
particular valuation method affects the value of IP assets.
4. Nature, scope and strength/validity of the underlying IP asset- The competitive strength of
an IP asset determines the comparative valuation that it shall hold in the market.
Why do you need to valuate your IP assets
1. Licensing and Franchising- A thorough understanding of the IP Assets ensures an informed
negotiation and decision making regarding the terms and conditions at the time of licensing-
1 International Valuation Standards, (Seventh Edn.), pg 27.

3. in or licensing-out of IP especially in determining fair and robust royalty rates. In the case of
franchising too, both the franchisor and the franchisee require a thorough understanding of
the value of the trademark(s) and trade secrets and know- how of other IP assets.
2. Merger & Acquisition, Joint Venture or Strategic Alliance
The primary reason for considering an M & A transaction is the value of the IP assets of the
target company. IP valuation enables the parties to take an informed decision on the
acceptable cost of capital or deciding on financial leverage strategy to be followed. It also
influences positively the resulting company’s value and share price. The strategy of world
class companies such as Volkswagen group and Tata group enunciates the IP valuation
technique to adopt brands.
3. Investment in Research and Development (R&D)
IP valuation helps in budgeting and resource allocation decisions. For example, if a company
is spending a significant amount of money on internal R&D but is losing ground to
competitors due to slow or late product introductions, it may need to rethink its R&D strategy
and processes. IP valuation also provides strategic guidance for new product development,
brand-extensions, line-extensions, managing foreign filing and prosecution costs, etc.
4. Financial Reporting
The recognition of the increasing share of IP assets in the total market value of enterprises
has contributed to the change in the way the accounting community has begun to treat IP
assets in financial reporting. The international accounting standards board (IASB) now
recognizes acquired and identifiable intangible assets (i.e., IP assets) and requires all
acquired IP assets to be recognised as assets, separately from goodwill, on the balance sheet
of the business acquiring the IP assets. For instance, when a brand is acquired, IP valuation is
done for the initial valuation as well as the periodical impairment tests for the derived values
to be included in the balance sheet.
5. Optimizing Taxation
In devising ways to optimize the tax to be paid by a company, its assets, including its IP
assets, require to be valued. IP assets create numerous opportunities for tax planning in both
third party transactions as well as internal strategies such as cross-border transfer pricing and
centralizing the ownership of IP assets in IP holding companies. The internal revenue service
or other tax authorities would like to know as much as possible about the basis for any value

4. determination used when allocating portions of the purchase price associated with the
acquisition of a company. Valuation of IP assets helps in assessing fair transfer prices for the
use of IP assets, including brands, to subsidiary companies.
6. Insurance of IP assets
A completely new market is opening up for the insurance of IP assets with a number of major
insurers in the developed countries creating products tied to the capital value of IP assets,
especially trademarks/brands. Valuation is of extreme importance as far as Insurance is
concerned.
How to determine the value of your Intellectual Property
Evaluation of IP can be a challenging process. The most suitable method for IP assets
depends upon the premise of purpose to be derived from the result, assets subjected to
valuation and the specific section for which the valuation is prepared.
The two effective ways of valuation are:
Market based- This is the most commonly used approach, this approach is based on the
comparison with the actual price paid for a similar IP asset under comparable circumstances.
The calculation would be accurate if there exists appropriate information on the nature and
extent of rights transferred, circumstances of transaction for eg; license agreed in litigation
settlement. The process initiates with research of an appropriate market to obtain the
transaction information about sales, licensing of subject IP. The second step is to select
relevant units of comparison such as “per drawing”, “per location”. “per customer” and
develop a comparative analysis for the units considering factors such as profitability, risk,
Industry, company structure, strength of IP rights, etc.
Income Method- It values the IP on the basis of amount of financial income that IP is
expected to generate. In order to evaluate, project the revenue flow over remaining useful
life of asset and offset those reveues by the cost related to asset. The risk has to be
discounted from the amount of income by using discount rate or capitalization rate. The
method is most suitable for capturing value of IP that generates stable cash flows. However,
the method does not consider independent risks associated with an IP asset and lumps all the
risks together to be adjusted in discount rate.

5. CONCLUSION
Ip Valuation has never received the importance it deserves. One of the factors affecting a
business’s success or failure is the degree to which it exploits its IP Assets and values it.
Accounting standards do not represent the worth of IPR of a business.Valuation is a complex
process and requires skilled professionals to evaluate the assets. There are various companies
that provide assistance and consultance for it. Companies such as Deloitte, Price Waterhouse
Coopers, KPMG provides with experienced IP valuation services.
(Mention khurana)