There are a lot of things that come into running a successful business. A unique idea (or a unique way to deliver an existing product or service). A business plan. Funding. The will to work long hours to make it all come to fruition. And while many factors influence the value of your business once it’s up and running, one of the most important aspects is intellectual property. At the end of the day, it may be what makes you shine among the competition and what makes clients and customers recognize your brand instantly. But how can you determine the extent of its impact on the value of your business?
What is Intellectual Property
Intellectual property (IP) is any original intangible creation. This includes anything that you created from your own mind/imagination, including:
- The name of your business
- Logos
- Slogans
- Brand designs
- Jingles
- Songs
- Photography
- Architecture
- Software
- Literary works
- Paintings
- Drawings
- Written content
This type of property is protected by federal laws, organized in four categories — trademarks, copyrights, patents, and trade secrets. The reason you want them to be protected is to prevent someone else within your market and geographical location from using them for their own financial benefit.
Why is Valuing Intellectual Property Important?
Intangible assets comprise the bulk of the value of a business. After all, if you’re selling, say, a soda company, what makes it valuable are the trade secrets that have made it successful, the brand recognition, maybe even the accompanying jingles from advertisements. It is all these things that differentiate the business from other sodas in the market — not the factory itself.
All of these components significantly increase the value of the business, licensing agreements, and potential mergers and acquisitions.
How Does Intellectual Property Affect the Value of Your Business?
Intellectual property is often the largest asset of a business. It’s also a complicated endeavor — you must estimate the value of your IP while at the same time taking into account market fluctuations. To determine how it will impact the value of your business, you can take several approaches:
Cost-Based Valuation
A cost-based valuation applies to starting businesses that aren’t as established yet, but have already developed valuable intellectual property. It can also be applied to the sale of intangible assets that have not been turned into a business yet. To determine the value of such a business, take into account the following costs:
- Obtaining approval from the relevant federal agency (USPTO or US Copyright Office)
- Registering the intellectual property
- Equipment to create patented property
- Creating prototypes
- Testing products prior to releasing them into the market
In a nutshell, a cost-based valuation takes into account how much it will cost to protect, develop, and recreate the intellectual property.
Market-Based Valuation
To determine a business’ market-based value, look at your products/services performance within your market. You can study the selling price of similar businesses. The more recent these comparable transactions, the more accurate the valuation will be. In summary, you’re looking to identify the fair market value. When doing this, consider the following factors:
- Active buyers looking to purchase a similar asset (supply and demand)
- Market transactions involving similar assets
One drawback of using market-based valuation is that a lot of these transactions are confidential, so it may become challenging to find publicly available data that will guide you in your process. In addition, when you do find information, you want to take into account the context of the sale — whether a business was in optimal shape, sold due to insolvency, or the sale was the result of litigation.
Income-Based Valuation
An income valuation analysis is performed to identify the capacity of a business’ IP to continue generating revenue. This is done by using an investment formula called the net present value (NPV). To determine a business’ NPV, you first consider several factors:
- Costs of registering the intellectual property
- Size of the market
- State of the economy
You then use the following formula: NPV = cash flow/1 + i x t
I = initial investment
T = time periods
Once you have a number, subtract the amount of the initial investment of acquiring the business. This helps a buyer determine the future profitability of the business. The more cash flows a business has, the more complicated the formula gets. You can get a ballpark figure by using an NPV calculator, but to have a concrete number and take into account all relevant factors, it behooves you to consult with an intellectual property attorney.
In fact, having expert guidance is crucial, since obtaining it will allow you to maximize profitability and be aware of the tax implications from the sale of a business.
How To Maximize the Value of Your Business’ Intellectual Property
While coming up with a number is a lengthy, challenging process, there are things you can do to optimize your profits. Before getting ready to sell, organize your IP by doing the following:
Audit Your Intellectual Property
Make a list of everything in your business that’s considered intellectual property — copyrights, trademarks, patents, and trade secrets. Then make sure that all registrations and fees are up to date. If there are any new regulations that may affect their protections, make sure to hone up on your knowledge of it and act accordingly.
Research the Market
If you have significant competition — and you’re one of the top performers — this will significantly increase the value of your intellectual property. Keep tabs on what’s going on within your industry and compare how what other comparable companies are doing are impacting their market value.
Look for Ways to Optimize the Value of Your IP
Look for opportunities to increase the value of your intellectual property. This may include entering into licensing agreements or collaborating with other leaders within your industry. The best way to determine how to move forward is to consult with an experienced intellectual property attorney. They will be aware of market trends and their implications for your business.
If You Need a Consulting Regarding the Impact of Intellectual Property on Your Business, Sanchelima & Associates Can Help
Sanchelima & Associates, P.A. is one of the leading intellectual property law firms in South Florida. With over 40 years of experience, we have represented the IP interests of a wide array of businesses, including Fortune 500 companies — and we can do business in the United States and internationally. Whether you need a consultation or prosecution of a patent, trademark or copyright, we can protect your business’s interests.
Contact us to schedule an appointment.
