Intellectual property can account for a substantial portion of a business’ assets, even in a small enterprise, and in some cases can be the most valuable asset an organisation owns. This brief guide covers some of the more important aspects of identifying, protecting, and leveraging intellectual property’ in small and medium-sized businesses.
What is intellectual property?
The term ‘intellectual property’ or ‘IP’ basically refers to specific creations of the mind for which property rights are recognised. It can include designs, inventions and discoveries as well as literary, artistic and musical works and even symbols words, and phrases, including software.
Your IP will often be an essential element in your business or brand identity, something that distinguishes you from your competitors and a crucial factor in your ability to attract and retain customers. And, of course, it will often play a crucial role in your marketing activities.
The gross value added to the UK economy from IP created by UK businesses is currently estimated to be £54 billion a year!
The value of IP
Generally, IP only has value if you can establish ownership rights, or intellectual property rights (IPRs). Once IPRs are established they can be attributed monetary value and traded in the marketplace, thus rendering an intangible assets much more ‘tangible’. For example, you can:
• Earn royalties by licensing them
• Leverage them in strategic alliances
• Use them to secure loans.
• Sell them separately or as part of a wider business disposal
There are many different ways to value IPRs and no one method is suitable for all situations. Each method has advantages and limitations, and in some cases it might be useful to use more than one method to arrive at a valuation. Three common methods for valuing IPRs are:
The cost method. This method looks at the costs of developing or creating an IPR, or to put it another way, how much it would cost to recreate it. It takes into account factors such as R&D costs and IP protection costs.
The income based method. This method attempts to assess how much income can be generated from licensing or selling the IPR.
The market-based method. This method, which is generally regarded as the most realistic, attempts to arrive at a ‘real market value’ of an asset by comparing recent sales of similar assets. The weakness of this approach is that it relies on detailed information about such transactions, which is often not available in the public domain.
Where we can help with valuations
There are of course, specific times when IP valuations should be conducted or reviewed such as when:
A purchase, sale, or licensing agreement of a brand or other IP is being considered
IP is included in negotiations for a joint venture or strategic alliance
IP needs to be valued for financial reporting purposes
The market value of IP needs to be determined for tax purposes
An independent valuation of IP is required for commercial disputes or expert witness reports
Contact us if you need help or advice with any of these.
Rules of thumb
It should be noted that according to the Intellectual Property Office (www.ipo.gov.uk), there are some rules of thumb that are often used to estimate royalty rates for patents and trademarks.
In many negotiations the royalty rate for patents is 25-33% of the licensee’s anticipated gross profit on sales of products that use the patent. For trademarks the figure is in the region of 10-15%. Usually royalties are paid on net sales, in which case they are commonly around 5%.
Though these are crude averages and circumstances vary considerably from product to product and from industry to industry, they do nevertheless act as benchmarks in the marketplace and any significant departure from them would need to be justified.
Often the terms ‘intellectual property’ (IP) and ‘intellectual property right’ (IPR) are used interchangeably, but strictly speaking, IP is…