For many businesses, patents, trade marks, designs and other intellectual property are worth more than the physical assets on the balance sheet.
Yet, unlike a piece of equipment or property, IP has no obvious market price. Knowing how to calculate intellectual property value properly matters whenever you are licensing, selling, raising capital, entering a joint venture or resolving a dispute.
At IP Guardian, our registered attorneys work with clients to understand not just how to protect their IP but how it contributes to the underlying value of their business.
Why valuing IP is different from valuing physical assets
A piece of machinery can usually be valued by comparing it to similar equipment on the second-hand market. IP rarely has that kind of direct comparison available.
Two patents covering different technologies, or two trade marks with different levels of consumer recognition, can have vastly different values even if they cost the same to obtain.
Because of this, IP valuation tends to rely on a mix of financial modelling and professional judgement, drawing on one or more of three recognised approaches.
The three core approaches to valuing IP
Market approach
This method looks at what comparable IP assets have sold or licensed for in the open market. If similar patents, trade marks or designs in your industry have recently changed hands, those transactions can provide a useful benchmark.
The market approach works best where genuinely comparable transactions exist and are publicly known. In practice, this can be difficult, since many IP transactions are confidential and no two assets are ever truly identical.
Income approach
The income approach estimates the future economic benefit the IP is expected to generate, then discounts that value back to today’s terms. This is often done by forecasting the additional profit, royalty income or cost savings the IP is likely to produce over its remaining useful life.
This is the most commonly used approach for IP that already generates revenue or is close to doing so, such as a patented product already on the market or a trade mark with established brand recognition.
Cost approach
The cost approach values IP based on what it would cost to recreate or replace it, whether that is the original development cost or the cost of developing an equivalent asset today.
This method is often the least reliable choice for mature or highly valuable IP, since the cost of creating something rarely reflects the value it later generates. It tends to be more useful for early-stage IP where there is limited trading history or revenue to model.
Most professional valuations use more than one of these approaches together, cross-checking the results rather than relying on a single method.
Factors that affect the value of your IP
Many business owners do not understand exactly what contributes to the value of their IP. Here’s a general checklist to give you a better understanding.
- The strength and scope of the legal protection, including whether a patent, trade mark or design has actually been registered and remains in force
- Remaining term of protection, since a patent nearing the end of its 20-year term is generally worth less than one recently granted
- Market size and competitive position, including whether the IP creates real barriers to entry for competitors
- Existing licensing arrangements or revenue already tied to the IP
- The strength of the underlying business relationship with the IP, including brand recognition for trade marks or technical differentiation for patents
- Geographic coverage, since IP rights are territorial and protection in one country does not extend automatically to another
- Risk of challenge, including whether a patent or trade mark could be vulnerable to opposition, revocation or a finding of invalidity
How Australian law treats the value of IP
Tax treatment
Under the Income Tax Assessment Act 1997 (Cth), certain intellectual property, specifically patents, registered designs, copyright and licences relating to these rights, are treated as depreciating assets under Division 40.
This allows businesses to claim deductions for the decline in value of that IP over its effective life. Trade marks are generally treated differently and are not depreciated in the same way, though they remain relevant for capital gains tax purposes.
When patents, registered designs or copyright are sold, any gain is generally dealt with under the Division 40 depreciation rules rather than as a capital gain. Capital gains tax, under Parts 3-1 and 3-3 of the same Act, is more relevant to the sale of trade marks and goodwill. Either way, the value attributed to the IP at the time of a transaction can have direct tax consequences.
Accounting treatment
For financial reporting purposes, Australian businesses generally apply AASB 138 Intangible Assets, which sets out when IP can be recognised on the balance sheet and how it should be measured.
Internally generated IP, such as a patent developed in house, is often not recognised at the value it may eventually be worth, while acquired IP is typically recorded at cost (or at fair value when it is acquired as part of a business). Some internally generated assets, such as brands and customer lists, cannot be recognised at all. This is one reason a business’s balance sheet can significantly understate the real value of its IP portfolio.
Because tax and accounting treatment can materially affect how a valuation is used and reported, it is worth involving both a valuation professional and your accountant or tax adviser early in the process.
Common situations where IP valuation matters
There are several situations that you may encounter in the lifecycle of your business that will be directly affected by the value of your IP.
- Licensing a patent, trade mark or design to a third party and negotiating royalty rates
- Selling a business or a specific IP asset
- Raising capital from investors who want to understand what the IP is actually worth
- Mergers and acquisitions, where IP often makes up a significant part of the purchase price
- Family law, insolvency or shareholder disputes where IP forms part of a broader asset pool
- Litigation, where damages or an account of profits may depend on the value attributed to the IP
Practical tips for businesses
Give yourself some peace of mind by following our checklist of practical tips for IP valuation:
- Keep your IP registrations up to date, since unregistered or lapsed rights are generally worth far less than protected ones
- Maintain clear records of development costs, licensing income and any existing agreements tied to your IP
- Engage a qualified valuer for any transaction of real significance, rather than relying on internal estimates alone
- Review your IP portfolio periodically, not just when a transaction is on the horizon, so you understand its value before you need to act on it
- Consider how remaining protection term affects value, and factor renewal and extension timing into any valuation
- Involve your patent, trade mark or design attorney alongside your valuer and accountant, since legal status and enforceability directly affect what the IP is actually worth
IP Guardian, the experts in IP strategy
Valuing intellectual property sits at the intersection of law, finance and strategy. At IP Guardian, our registered attorneys help clients understand the legal strength of their IP, a critical input into any valuation, and support commercial decisions around licensing, sale and investment.
Servicing Sydney, Melbourne, Brisbane, Adelaide and the Gold Coast, our team is here when you need us. Contact IP Guardian today on 02 9071 0130.
