Did you know that your Intellectual Property (IP) may have monetary value? The process of valuing your IP can help your small business make strategic decisions, secure financing and can be a useful tool during business negotiations.
Why does intellectual property have value?
Intellectual property is considered an intangible asset, which is the non-physical property of a business. IP assets, like copyrights, patents, trademarks, industrial designs and trade secrets, are legally protected and can be legally enforced.
Learn more about the basics of intellectual property rights in Canada.
But what makes these intangible assets so valuable to a business?
- Registered IP can stop competitors from creating similar products which could push your business aside in the market
- IP can be licensed to third parties, creating a valuable income stream for your business.
- IP can boost your business profile
Why is intellectual property valuation important?
Every form of intellectual property is essentially an asset, and because of that, they can be bought, sold or used as securities, just like property. IP is often at the core of business valuations that help secure financing from investors. Knowing the value of your intellectual property can simplify the licensing process, or even help you determine the royalty rates you should receive. A reasonable IP valuation can increase the overall value of your business, making it more appealing to investors and can also provide you with collateral for loans. And, in some cases, proper IP valuation can help calculate damages owed due to an infringement.
When is intellectual property valuation used?
There are several situations where IP valuation is important:
1. Infringement damages
Your small business may need to calculate an IP valuation for damages as part of an infringement lawsuit or settlement.
If you are considering licensing your IP, an independent analysis on your intellectual property is an important step in calculating royalties.
3. Internal decision-making
Research and development, investment opportunities, prioritizing the cost of IP assets to maintain and divesting IP assets are just a few reasons your business would require the value of its intellectual property.
4. Bankruptcy or liquidation valuation
If you are liquidating or declaring bankruptcy, a valuation may be required by the courts for reorganization or the selling of IP assets.
5. Financial accounting, tax or compliance
Asset securitization, financial transactions, tax planning or financial compliance reports are all reasons the tax authority, investors, banks or creditors may want an IP valuation.
How is an intellectual property valuation performed?
In Canada, valuations are typically carried out by someone who has had specific training in finance and IP valuation. There are a variety of different ways to perform a valuation, depending on how the results will be used.
The quantitative approach for valuing IP assets include:
- Cost Method: the cost to replace or recreate your IP assets
- Market Method: the value of similar IP assets sold under similar circumstances
- Income Method: the value of the income or cash flow the IP asset brings to your company
There is also a quantitative approach to valuing IP assets, when IP is valued at least partially in non-monetary means. But this valuation process is typically only used for internal business decision-making circumstances.
Your IP valuation will very likely change over time as your business grows, or your competition or market changes, so it is important to revisit your IP valuation on a regular basis.
Tips for protecting your intellectual property
In order to have an IP valuation, you need to have IP to value. That may mean you need to register your intellectual property. The small business lawyers at Benchmark Law can help you determine if you need to take any steps to properly protect your IP.
Learn more about the benefits of establishing intellectual property protections for your small business.