Watch Your Assets …

Business assets have value.  Understanding the value of assets on hand is important to starting a business, to conducting a business, and to dissolving a business.  Ironically, many business leaders who are diligent about routinely tracking the value of hard assets, like a truck or a building, have no similar discipline in place to measure and monitor the value of the business’s intellectual assets.

Why To Value?

Many business eventualities may bring about a need to estimate the value of a company’s intellectual assets.  The following are just a few examples of common business questions that may imply a need to perform a valuation on a company’s intellectual assets :

– Is now the time to sell a particular asset (or even the entire business) while its value is high?

– Is our company earning a reasonable royalty (or charging an optimal price) for an asset given current market realities?

– How much is a fair settlement amount in exchange for dropping a lawsuit for infringement of an asset?

– Should we build a new intellectual asset that the company needs, or instead seek to buy such an asset from another?

– Is now the right time to drive our current intellectual asset to end of life by introducing the next generation replacement?

– May the company leverage an intellectual asset by using it as security to borrow needed funds?

– What are the tax implications of a given transaction involving an intellectual asset, or of the fluctuation in the value of the asset over the past year?

– Is the company in compliance with all regulatory requirements that apply to a certain transaction involving an intellectual asset?

How To Value?

Several valuation models are commonly used to estimate the value of intellectual assets, whether in a business context or in a court of law (e.g., damages calculation).  Furthermore, more than one model may be applicable in a given set of circumstances.  The following are some of the most commonly used valuation models:

• Market Approach – the fair market value of an asset is ascertained by researching the real-world marketplace for transactions involving sales, listings, and offers to purchase or license comparable assets
• Cost Approach – value is based on the cost to obtain an asset of equal value, taking into account one or more of reproduction cost (building an exact replica of the asset), replacement cost (recreating the functionality of an asset), and cost avoidance
• Income Approach – value is calculated from expected returns attributable to an asset, based on the present value of expected income to be earned (e.g., license royalties)

 

Who Can Value?

Valuation is more an exercise in accounting and/or finance than it is of law.  Traditionally the purview of accounting professionals like Certified Public Accountants (CPAs), the field has more recently spawned certification programs specifically for valuation practitioners.  Recommendation:  When valuing intellectual assets, seek the help of a specially-trained and experienced professional.  In almost all valuation scenarios, the stakes are too high to get it wrong.

(Originally posted September 4, 2012)