It is often necessary and beneficial for a company to assess the value of its intellectual assets. Such assessments can be used to help determine the worth of the business or to evaluate the effectiveness of the company's R&D program. No matter the reason, the assessment of IP is generally not straightforward. Care must be exercised to ensure that the valuation method selected is appropriate to the use to which it will be put.
Three valuation methods that are commonly used include:
- The Value in Use Approach
- The Market Value Approach
- The Cost Approach
For the Value in Use Approach, the value of a business' intellectual assets will depend both on how the assets are currently employed and how the owner plans to use them in the future. The utilization of the intellectual assets will determine the actual benefits that the business realizes compared to how the business would perform in the absence of the intellectual assets. Sometimes referred to as the Income Approach, this method assesses the assets on the basis of how much they contributed to the margin of the business through either:
(a) A manufacturing cost saving
(b) An increase in sales volume, or
(c) A premium in selling price.
If the Market Value Approach were used, the value of the intellectual assets would depend on the price a willing buyer would pay for a clearly defined body of intellectual assets. The outright sale of intellectual assets is seldom done without accompanying and complementary fixed assets. In these situations, a portion of the sale price can be applied to the purchase of the fixed or capital assets and the balance can be attributed to the acquisition of the intellectual assets. The Market Value approach tends to generate a lower value than the Value in Use approach.
The Cost Approach , focuses on the costs incurred to acquire the intellectual assets. These would typically include the cost of the research and development work and the cost of technology acquisition, such as the purchase or licensing of intellectual property rights. This approach typically does not factor in aspects such as trade secrets, trade marks or trade names and tends to generate the lowest valuation for an organization's intellectual assets.
Vertex has developed a methodology for determining the value of a company's intellectual assets. The Vertex model is ideally suited to assessment of entire intellectual property (IP) portfolio(s). A key component of the Vertex method is the technique for determining the Value in Use of an organization's IP. In addition, Vertex can provide estimates of the worth of a company's IP using both the Market Value and the Cost Approaches. The latter, when compared with the result of the Value in Use evaluation can provide an indication of the organization's return on investment for their R&D program.
Vertex's methodology for technology valuations involves the following steps:
- The Vertex study team develops a basic understanding of the specific
components of the intellectual asset portfolio. Depending on the state
of the organizations records, this can involve determining the composition
and status of the company's intellectual asset portfolio at the time of
the study. Depending on the size of the portfolio, the constituents of
the IP may be grouped into clusters associated with specific product lines
- Information on such things as the sales of products based on the IP,
the costs of development, manufacturing costs and so forth is collected
and analyzed. And based on discussions with senior management personnel
associated with the various technologies and products, information about
future trends and growth rates is collected. Vertex considers factors such
as interest rates, market conditions and business risks, in addition to
financial inputs regarding the actual past and projected future performance
of the product lines and intellectual assets being considered in the analysis.
- The Vertex model is then used to analyze the information gathered to
produce results for the Value in Use, Market Value and Cost Approaches.
NPVs for all values are calculated to facilitate comparison.
- A report, summarizing our findings and providing conclusions and recommendations, is then produced for our client.
Vertex's technology valuation analysis can be used to assess the worth to an organization of its R&D program by providing a quality estimate of the return it is getting on its investment in technology development. It can also help to highlight trends in the various technologies and products a company may have. Our analysis is intended to provide an order of magnitude assessment of the intellectual asset porfolio and is not meant to withstand the rigors of a financial accounting review.