Do you know the value of the Intangible Assets in your company? What are Intangible Assets? There are two types of intangible assets:
- Discrete Intangible Assets have independent legal existence and may be sold separately from a business. Examples of discrete intellectual property include: patents, trademarks, copyrights, franchise agreements, proprietary processes or systems, trade secrets, etc.
- Non-Discrete Intangible Assets have added value as part of the overall company but cannot be transferred separately from the business. Examples of non-discrete intangibles include: non-compete agreements, customer lists, goodwill, etc.
Not all IP is discrete. There are some forms of IP that are non-discrete intangible assets. Examples might include domain names, brand identities, etc. The question that has to be answered to determine the type of intangible asset is whether the asset would have any value without the business attached to it. This question is typically resolved by answering the following questions:
- Is the IP subject to specific identification and recognizable description;
- Is the IP subject to legal existence and protection;
- Is the IP subject to the right of private ownership and can the private ownership be transferred legally;
- Is there tangible evidence that the IP asset exists;
- Has the IP been created or come into existence at an identifiable time or as the result of an identifiable event;
- Is the IP subject to being destroyed or terminated at an identifiable time or as a result of an event.
In today’s economy, the majority of assets owned by companies are intangible assets. Tangible assets in companies have diminished in recent years. Companies are increasingly looking to acquire or capitalize upon undervalued and underused IP.
There are many business reasons why a valuation of the IP is required including:
- Evaluating potential merger or acquisition candidates;
- Identifying assets that drive value within a company;
- Allocating the purchase price in a business combination;
- Selling or spinning off the rights to the IP to a new company and/or investor(s);
- Valuing the IP in a lost profits or shareholder dispute litigation matter;
- Seeking financing based upon the value of the IP in the company;
- Adding value to the shareholders of the company at shareholder meetings;
- Internal decision making reasons.
There are a number of approaches to value that can be used to value IP. Each type of IP needs to be analyzed separately and the appropriate methods to value applied to the type of IP. Methods might include:
- Market comparisons of similar types of IP (if available and accessible)
- Income approach (analyzing the strengths and weaknesses of the IP)
- Discounted Cash Flow Analysis
- Replacement Cost
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