Why is IP so different than other business assets? What are the instances or events which trigger an IP valuation?
There are numerous reasons why we value IP. The 10 most prevalent are the following:
1. Transfer – moving IP from one entity to another. The issue here is that this is a taxable event, to the extent that the value exceeds the cost basis. Additionally, the transaction may involve different shareholder or interest holders in the separate entities. Valuation of the IP may also be important to preclude claims of fraudulent conveyance.
2. Transfer Pricing – critical when IP is “moved” offshore and “rented” by onshore parent or subsidiary. Need fulfilled by assigning value to and the proper royalty rate for use of the IP.
3. Bankruptcy – the IP may be the most significant asset available to the debtor (Chapter 11) or outside buyer.
4. Company Sale – IP often encompasses the most valuable asset of the selling company, and should be isolated as such. The balance sheet usually does not include this value unless the IP were acquired.
5. Solvency Opinion – as part of this exercise, all assets are to be valued at market: one test for the positive opinion of solvency is that the restated assets exceed the liabilities.
6. Allocation of Purchase Price – when a company is acquired, each asset is restated at Fair Value for accounting purposes. This allocation involves the fixed assets and each major IP purchased.
7. Capital Raise – important for startups and for the continued development and revenue generation of IP, whereby new capital may need to be raised. A supportable IP valuation should be conducted.
8. Litigation – valuations are required to determine lost profits from a contract breach. Also, infringement or degradation of the IP will likely result in a loss of value.
9. IPO Disclosure – as part of the disclosure of relevant information on the IPO candidate, the IP (and value thereof) may be central to the pre-IPO documentation.
10. Royalty – owners of patents (or patent applications) may decide to license the IP or borrow against it. This license requires the determination of a reasonable rate and term. Another royalty stream valuation is based upon contractual residual income to be received for movie, music, or other contractual rights.