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Techniques for valuing Intellectual Property (IP)

Intellectual Property Rights (“IPR”) are worth only what a buyer or licensee will be willing to pay for them.

There is no fixed set of rules that can be applied to every valuation.  The particular valuation technique selected will very much depend on the unique qualities relating to each IPR and the circumstances surrounding each commercial agreement, such as product market share, barriers to market entry, legal protection, IP’s profitability, economic useful life (as opposed to legal life), growth forecasts as well as industrial and economic factors.

In the UK there are several recognized methods of valuing Intellectual Property Rights.  No one method is 100% perfect for a particular situation and equally, no one method is suitable for every case that arises.  This is why it is common for one method to be used and then a second method to be evaluated as a way of cross checking the results.  This is sometimes referred to as a Valuation Sense Check.  Always remember that in valuing IPR, the process can be subjective and there is no obvious right or wrong answer.

The majority of sellers and licensors usually require an upfront payment in addition to a royalty payment.  The larger the upfront payment is, usually the smaller will be the royalty rate.  On the other hand, buyers or licensees will attempt to resist any upfront payment on the grounds that they will be required to pay out a large sum before they can receive any income from an IPR and in addition, the upfront payment may bear no relation to the amount of income that the IPR will generate in its economic useful life.  Buyers or licensees will usually want to share development risks with the IPR.  It is for this reason that some buyers and licensees may want to negotiate a higher royalty rate in order to avoid the need for an upfront payment.  However, if the IPR is not successfully exploited, there may be no income on which a royalty can be paid to the seller or licensor.  It is for this reason that in the majority of cases an upfront payment is required and it will therefore be down to negotiation between the two parties over the amount of any upfront sum and the future royalty to be paid for the IPR.

To find out the three most commonly used methods to value IPR, plus information on Royalty Rate Determinations, or to request a business valuation report,  please contact david@gtma.co.uk

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