Intellectual Property Adds Major Value to a Business Sale
If there were one facet of business value that ranked as highly as year-over-year profits, it would be intellectual property. Everything from patents to trade secrets are worth something on the market, especially if it plays a major role in the success of your business.
As you near your business transition, it is imperative to use a variety of methods to price your intellectual property. When a buyer purchases a business as-is, they are under the assumption that your brand and intangible assets are going with it. Being ready with a number on the table is going to aid in negotiations and increase the perceived value of your company.
But, intellectual property is explicitly intangible. Coming up with a fair value for it can be difficult, as there is no original purchase price or physical material to assess. You have a few angles that you can approach the problem from: income-based, cost-based, and market-based. Of course, all of these can be combined as appropriate to suit the needs of your business.
What Counts as Intellectual Property?
Just about anything that is a) unique to your business, b) generates profit or increases efficiency, and c) intangible can go under the title of intellectual property.
You may be surprised by the number of things that should be included in the total value. An article from Wells Fargo neatly categorizes the varied assets into 4 core examples:
- Trademarks, which includes “names, phrases, and symbols that differentiate your brand from others in your industry.” That would include everything from a specific sound you use in advertisements (like the 20th Century Fox sound that plays at the beginning of movies) to color combinations that are specific to your brand (Wal-Mart’s blue and yellow combination).
- Copyrights, which “grant legal use to anything you create that expresses or embodies an idea,” including art, video, sound-recordings, software, books, and graphics.
- Patents, and the products that they represent.
- Trade Secrets, such as recipes, techniques, or methods that are unique to the way you do business. Recipes are a common trade secret, such as KFC’s herbs and spices. Other examples include surveys, research, data, customer databases, or pricing information.
In this model, you would use data and projections to estimate the current value of the future income that the buyer would be able to obtain through use or ownership of the intellectual property. Also in play is the predicted economic life of the asset and possible economic risk.
Once all figures are calculated, they are combined to create the NPV, or net present value. If the NPV is negative, it indicates to the buyer that purchase of that particular piece of intellectual property is going to cause overall loss, while the opposite is true for a positive value.
IPWatchdog also notes that royalties can come into play when calculating the value of an intangible asset– “a value can be assessed based on how much money in royalties the company would have to pay if they didn’t own their intellectual property assets outright.”
The cost-based model is heavily based in market research, as the value is calculated by assuming that the original IP is substituted out for a new, but equal, property.
A good example is a particular product, such as a vehicle part or a piece of software. The owner of the intellectual property would conduct research to determine how much it would require in materials, design teams, overhead, and marketing costs to create a similar asset from scratch.
If the value of the intellectual property is greater than the replacement cost, the buyer is not going to be interested unless they are looking for a means to avoid doing the footwork in creating a replacement asset. Typically, though, intellectual property that is valued below the market cost of replacement is going to sell far better.
While only appropriate in a limited number of situations, the market-based approach compares the value of similar assets and prices based on these comparisons. In many cases, though, due to the uniqueness and intangibility of intellectual property, there are not many market examples to compare to.
Typically, the market-based model is most appropriate for websites, software, and the like. If you own the intellectual property of a new social media site similar to Instagram, for example, you can compare market sale prices for other photo-based social media platforms.
Intellectual property can be pivotal in the business sale process. What might seem like an everyday acquisition can take on a whole new light if trade secrets, methods, and branding come into play. Inevitably, you’ll walk away with more money in your pocket and the knowledge that the business you worked to build will continue to grow under new ownership.
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