Circumstances of valuation of IPR08/10/2022 1 By indiafreenotes
Intellectual property rights valuation or IPR Valuation is one of the most critical areas of finance that comes into play during the sale and purchase of companies and during solvency, merger, and acquisition transactions. Intellectual property is intangible assets that are either already patented or a patentable product, process, or service, or a trademark, copyright, or brand. It’s the unique creation of the organization, responsible for its distinction in the market. Though intangible, it’s often a major driver of success for an organization. Valuation of Intellectual Property Valuation Rights fundamentally means the process of arriving at a fair value of a Company’s Intellectual Property that can be monetized and can leverage the overall selling price of the company. For a profitable sale transaction, it’s extremely important to place the selling price at such a rate that it’s sold at the best possible value. The IPR valuation process helps to achieve a part of this justifiable selling price.
Reasons of intangible assets valuable to a business
- Registered patents prevent competitors from launching similar, competing products and potentially pushing the business aside within the market.
- Holding the rights to a product design enables an organization to create a singular offering to their market, and price their products accordingly.
- The company’s position and profile as an innovative business are boosted.
- For design-only businesses, the license for IP, utilized by third parties to manufacture and sell their products, provides a major and valuable income stream.
Essentially, holding assets can increase revenue or reduce business costs, and once they generate an income for the business being sold, a variety of valuation methods will be utilized.
There is no particular method of valuation that’s suitable for each business sale, however the foremost appropriate one depends on a variety of things, including whether the intellectual property rights (IPR) are fully developed and functioning.
Valuation Based on Replication Cost
This is the cost that the acquirer would have to incur in order to replicate the intellectual property. There is also a time component to this calculation, in that the acquirer might require years of effort in order to create the intellectual property. If the acquirer wants access to the property immediately, it should be willing to pay a premium to buy it from the acquiree.
Valuation Based on Market Price
This is the price that third parties would pay for the intellectual property if it were put up for bid in a fair market, with multiple bidders. An acquirer may want to pay more than this amount in order to avoid a bidding war with potential competitors.
Valuation Based on Discounted Cash Flows
This is the present value of the cash flows currently generated by the intellectual property, with certain assumptions included regarding possible changes in those cash flows over future years. The rate at which these cash flows are discounted to a present value is subject to interpretation and negotiation.
Valuation Based on Relief from Royalties
This approach is based on the cost that the acquirer would otherwise incur if it were required to pay a royalty for access to the intellectual property. This approach may not work if access to the intellectual property cannot be obtained through a licensing arrangement.
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