What's the value of intellectual property?

Valuations can't be performed in a vacuum. Regardless of the type of property involved, a valuator's conclusions depend on many factors, including the scope and context of the engagement, the standard and premise of value, the type of ownership interest, and applicable law.

These factors are particularly complex for intellectual property (IP) valuations. Why? Because an appraisal of IP assets may be required in a variety of contexts and involve different bundles of rights. And the value of IP can depend on applicable statutory law, which defines its useful life and establishes the owner's rights to commercialize the property.

Purpose of the valuation
Value varies dramatically depending on a valuation's purpose. An IP asset's fair market value, for example, may be lower than its strategic value to a specific buyer who has the ability to maximize the asset's earnings potential. And its fair value for purposes of Generally Accepted Accounting Principles (GAAP) may diverge widely from its value for transfer pricing purposes or in a litigation context.

Interest being valued
The bundle of legal rights that make up an IP asset can be divided in different ways, so it's important for an appraiser to know what type of interest is being valued. Is it the entire "fee simple" interest? An interest in the entire bundle of rights for a limited time period? Or a license to use the IP? Is the license exclusive or nonexclusive, or is it limited to a particular use or geographic area? Is there an established market for similar IP assets?

The valuator should also know whether an IP asset is being valued on a stand-alone basis or as part of an aggregation of assets. For example, a patent may be valued together with other, related IP assets or with tangible assets, such as engineering drawings or specifications. Keep in mind that it may not be feasible to segregate IP assets and value them separately from a company's other assets.

Asset's useful and legal life
An IP asset's value is heavily influenced by its remaining useful life, which is defined by statute and is different from its legal life. A patent's term, for example, may be 20 years from the date it's filed but, in many cases, its useful life will be much shorter. Factors that can diminish an IP asset's lifespan include shrinking demand for related products or technological advances that render it obsolete.

Get on the same page
These are just a few factors that can affect IP valuations. To arrive at an accurate, useful value, work closely with your valuator to be sure you're on the same page and that you receive the type of valuation opinion you need.