Tuesday, September 7, 2010
Why Intellectual Property needs to be periodically valued?
There has a been a research study which says that S&P 500 derives 67% of its value from Intellectual Property (IP) or Intangible assets. Think about it for a minute. The largest export from America today is IP. In a deteriorating business climate, what sets you apart from others are sustainable competitive advantages such as your workforce, patents, trade marks, copyrights, goodwill, client lists, trade secrets and other protected and escrowed intellectual properties. You owe it to yourself to start building and sustaining companies that hold IP value. Today, most of the manufacturing and even a large part of R&D processes can be completed outside the US. This means that cutting edge IP is probably the only thing that will fetch valuation multiples in the 7 to 10 times revenue range. VISA, WalMart, Google all command a high P/S multiple because they all hold vast amounts of IP in the form of technology that really sustains their businesses for tens of years. Any company that does not hold IP and in turn does not enjoy a sustainable competitive advantage tends to see lower P/S multiples. So, what do we at Accuserve see when we value intellectual property? Though there are guidelines out there, many fall short of the changing headwinds in the nature and protection of IP. Two major things contribute to how much an IP is worth: the business value of the IP and how much the IP is legally protectible/protected. The business value of the IP, in turn, depends on factors such as the stage of development, novelty of use, difficulty of reproduction, size of the target market, barriers to entry, government support, volatility of the cash flows expected to be generated by the IP, prevailing royalty rates for similar IP, geographic range of application, and ease of licensing. Legal protection examines things such as the time period of exclusion, litigation aggression, escrow facility, and freedom to operate. While financial analysis contributes to developing cash flows associated with the IP, a through understanding of the qualitative factors is required to create factor models that capture qualitative inputs. We are experts in doing that. Given the importance that IP holds in today's environment, it is important to get an IP valuation that is highly supportable and fetches the optimal price.