Loved the recently launched movie, IP Man III starring Donnie Yen and starring Mike Tyson!
This inspired me to write about something totally unrelated except for the word “IP”.
Here’s the thing: any business that has a strong IP can certainly take a punch from its competitors when the going gets tough because of such ownership.
So what exactly is Intellectual Property?
Do you have a set of learning contents and curriculum? A mobile apps that has a relatively growing database of users/community? A procedure that is in place to help you generate revenue year on year? Do you have a secret recipe that is being adopted at your restaurant and yields a base of loyal customers?
If so, then you are an IP man!
Intellectual property is a general term for the set of intangible assets owned and legally protected by a company from outside use or implementation without consent.
An organisation that owns IP can generate value from it in several ways, namely through utilising it internally—for its own processes or provision of goods and services to customers—or sharing it externally. The latter can be achieved through legal mechanisms such as royalty rights and licensing. And you can even put a joint venture around it!
Managing your IP is the foundation for the market dominance and continuing profitability of businesses.
It is often the key objective in mergers and acquisitions and knowledgeable companies are increasingly using licensing routes to export to gain market share in multiple countries, outright sale of an asset, or a joint venture agreement.
Nevertheless, the role of intellectual property rights ( IPRs) and intangible assets in business is insufficiently understood by many SMEs.
For a better understanding of the IPRs of a company, some of the questions to be answered should often be:
- What are the IPRs used in the business?
- What is their value (and hence level of risk)?
- Who owns it?
- How may it be better exploited?
- At what level do I need to insure the IPR risk?
One of the key factors affecting a company’s success or failure is the degree to which it effectively exploits intellectual capital and values risk.
Management obviously need to know the value of the IPR and those risks for the same reason that they need to know the underlying value of their tangible assets; because business managers should know the value of all assets and liabilities under their stewardship and control, to make sure that values are maintained.
Valuation is, essentially, a bringing together of the economic concept of value and the legal concept of property. The presence of an asset is a function of its ability to generate a return and the discount rate applied to that return.
This rule is particularly significant as far as the valuation of intellectual property rights is concerned. More often than not, there will only be one or two interested parties, and the value to each of them will depend upon their circumstances.
Failure to take these circumstances, and those of the owner, into account will result in a meaningless valuation.
For the value of intangible assets, calculating the value of intangible assets is not usually a major problem when they have been formally protected through trademarks, patents or copyright.
But, what if……
…this is the case involving intangibles such as know how, (which can include the talents, skill and knowledge of the workforce), training systems and methods, technical processes, customer lists, distribution networks, etc.
These assets may be equally valuable but more difficult to identify in terms of the earnings and profits they generate. With many intangibles, a very careful initial due diligence analysis needs to be undertaken together with financial and legal experts.
With the asset you are considering, the valuer will need to consider some general rules:
- The operating environment of the asset to determine the potential for market revenue growth.
- The projection of market revenues will be a critical step in the valuation.
- The potential will need to be assessed by reference to the enduring nature of the asset, and its marketability, and this must subsume consideration of expenses together with an estimate of residual value or terminal value, if any.
- You have to recognise market conditions, likely performance and potential, and the time value of money.
- It is illustrative, demonstrating the cash flow potential, or not, of the property and is highly regarded and widely used in the financial community.
It is important to note that valuation is an art more than a science and is an interdisciplinary study drawing upon law, economics, finance, accounting, and investment.
Go ahead – be a Man. Be an IP man!