How to Value: IP Management

Circumstances in which IP managers would seek to value their intangible assets include business restructurings, company valuations, sales of intangibles, and fee calculations for intracompany use of intangibles.

Business Restructurings

Business restructurings occur when a multinational chooses to reallocate internal functions, assets, and risks which may involve cross-border transfers of intangibles or when a relationship with a third party changes, i.e. a distributor for the company is converted to a limited risk commissionaire. Transfers of intangible assets raise difficult questions both as to the identification of the assets transferred and their value.  To value their intangible assets, companies should follow three steps: 

1. Determine the economic useful life of the intangible - the valuation needs to take into account that the economic returns of most intangible assets will decline over time if they do not receive continued investments in maintenance, enhancements, and new development and calculate the value accordingly.
2. Calculate projected cash flows -  determining the appropriate recurring revenues associated with the assets, their appropriate operating margin, and the operating profit after taxes will aid in calculating an appropriate value for the intangible assets.
3. Determine an appropriate discount factor - an appropriate discount factor has to be applied against the cash flows in order to calculate a fair market value.  The discount rate used in a discounted cash flow calculation should reflect the risks of achieving the projected results of operations.

Company Valuations

In the event of a merger or acquisition, it is useful to calculate the value of the intangibles associated with a multinational including their know-how, marketing intangibles, and trade intangibles.  Since intangibles typically reflect between 40 - 80% of a multinational enterprise's value chain, valuing those intangibles can result in an adjustment in transaction price. 

License and Royalty Fee Calculations

For a multinational enterprise, the parent may have developed intangible assets which its subsidiaries may wish to use to generate more value-added on their products.  Example of this are trade secrets, trademarks, and know-how that can be traded within the firm.  Typically when this happens, there will be a license or contract in which specific license or royalty fees will be calculated based on the value of the intangible being transferred.