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HOW MUCH IS THAT IP IN THE WINDOW?

With due attribution to an old song (Doggie in the Window), for most companies there is no IP value in the window, or on the Balance Sheet. The reason is simple: costs to develop and protect the IP are expensed. Unless IP has been acquired, it does not appear on a balance sheet.

So why does a company care? There are a few reasons enumerated below.

  1. For a startup or early stage firm, the IP is usually the most valuable asset, and the reason investors put capital into these newbies. Any significant value of the IP is often a key aspect of the negotiated capital infusion; it usually improves the owner's posture and reduces the percentage of equity ownership that is sold.
  2. Recent figures for M&A transactions show an average 34% in all purchases is assigned to IP. If a company is seeking debt, the value of its IP will enhance access to credit and negotiating more funds at lower interest rates. At a minimum, the senior lenders will want the IP as added collateral.
  3. In preparing for a sale of your company, each IP should be separately identified. This detailed list will be part of the purchase agreement. In addition, due diligence should support the ownership, validity, and economic remaining lives of each IP. In the best of circumstances, the actual valuation of major IP is important to present to a buyer.
  4. Lastly, your IP may be licensed to a competitor. Your firm must carefully document the licensing agreement, as well as the appropriate royalty rate(s).
  5. IP may be contrived to an entity as a monetary or equity fulfillment. In these situations the IP value is absolutely required. We recently valued a restaurant brand that was transferred to a joint venture in exchange for an equity position.
  6. Companies which transfer goods and services among offshore and related entities are subject to the provisions of Internal Revenue Code Section 482. Crucial to meeting these standards of objectivity is an independent analysis of the intercompany transfer prices. An essential element to support the transfer pricing is the valuation on IP and arm's-length exchange prices.
  7. On occasion, a patent or other IP may be acquired outright. Valuation should be central to the asset acquisition.

The Mentor Group excels at IP valuations and royalty rates, including documentation and testimony for numerous litigation cases. Call us for a review of your requirements.

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