ip valuations, business strategy and portfolio management

valuation of intellectual property

Intellectual property represents the statutory and common law rights such as trade marks, patents, designs, copyright, business names, confidential information, technology and know-how.

It is essential to have a correct and rational valuation of intellectual property in the event of cross border assignments and in the case of mergers and acquisitions.  Where the proprietorship of South African intellectual property is transferred or assigned from a local proprietor to a foreign proprietor approval for transfer will be granted by the Reserve Bank only if it can be persuaded that the value is correct.  Providing the Reserve Bank with a rational valuation of the intellectual property will assist in obtaining the required clearance. 

In the event of mergers and acquisitions it is important to allot an appropriate value to the intellectual property portion of the goodwill.

International accountancy standards (IFRS) require that intellectual property should be listed on a balance sheet at valuation. Having a rational valuation of intellectual property can assist in this regard. 

Consonant with the general principles for determining the value of tangible assets, intellectual property may be valued on the basis of replacement cost, market value or in terms of various methods calculating value from a future income stream. 

valuation of trade marks

It is possible and acceptable to value trade marks on the basis of their fair market value.  To do so requires comprehensive and reliable information obtained from sales in the recent past of the same style of trade marks between willing, but not anxious sellers and willing but not anxious arms length buyers.  Given the nature of trade marks there is often little precedent or sufficiently reliable information available in South Africa.  In the absence of reliable comparative information this method of valuation cannot find wide application.

Trade marks can be valued on the basis of what it has cost to develop the trade mark.  The method is criticised because it often does not adequately take into account the value of the business which may be generated as a result of the trade mark.  The price of trade marks may not necessarily be the value thereof and for this reason the methodology has been considered not to be suitable and it has been criticised by commentators and writers.

It is possible to calculate the value of intellectual property on the basis of what it would cost to create new intellectual property which will serve the same purpose.   A calculation in this regard would have to take account of the failure rate of new businesses and, generally speaking, there is not a large enough body of reliable information available on the situation in South Africa to render this method appropriate or suitable in many cases.

A third range of methods rely on an income which may be generated, either factually or notionally, by “renting” out a trade mark or, to phrase it more correctly, by licensing a trade mark.  This category of methods is consonant with general accountancy principles and it holds that property has value insofar as it generates income or results in a saving.  When valuing a trade mark the theory holds that value can be measured by the present worth of the nett economic benefit to be derived over the expected life of the property.  The calculation revolves around three factors or integers, namely, the royalty rate, the turnover and the expected life.  With these three factors the value of the income reasonably expected from the trade mark can be calculated.  Once a number is obtained the nett present value may be calculated in accordance with standard financial accountancy methods and principles.  It is necessary to make certain assumptions with regard to long-term interest rates and a discount factor, which represents the risk attached to the investment quantified as a percentage added to the risk-free rate.