Financial Analysis
EQUITY, BUSINESS ENTITIES, ESTATES, INTANGIBLES, AND ECONOMIC VALUE

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VALUING INTELLECTUAL PROPERTY

DEFINING THE VALUE OF INTANGIBLE ASSETS CAN SIGNIFICANTLY IMPACT A COMPANY’S “TRUE VALUE”.

In today’s information-based world, commerce in intangible assets or intellectual property – copyrights, patents, trademarks, etc. – often overshadows that of tangible assets.  Entertainment, software, and media corporations recognize that the value of their strategic assets lies in their intellectual property, not the physical plant.

Defining the value of intellectual property has become more critical that ever.  How do you properly value an asset that can’t be easily defined or touched yet may yield fortunes?  Savvy companies turn to the expertise of Arthur Consulting Group. 

We specialize in preparing thoroughly documented tax studies and expert testimony for clients requiring independent support for negotiation, due diligence, reporting, audit, or litigation purposes.

WHAT IS INTELLECTUAL PROPERTY?

Intellectual property is an intangible asset with a measurable value not predicated on physical characteristics.  Intellectual property can refer to patents, trademarks, trade names, copyrights, and trade secrets or “know-how”, all of which have “rights”, attached to ownership.  The law protects the owner of intellectual property from unauthorized exploitation by others.

WHAT IS ACG’S METHODOLOGY FOR ESTABLISHING VALUE?

This overview of a trademark or brand valuation illustrates the required blend of technical expertise, experience, and skill needed to correctly value intellectual property.

ACG’s methodology is based upon the premise that an intellectual property’s true value is what another party would pay to buy or rent the asset in the marketplace.

Our valuation approach encompasses the following:

  • Identifying comparable royalty rate transactions for similar assets.
  • Evaluating the strengths of each asset being valued compared to similar assets.
  • Comparing the information found in the comparable transaction data with the evaluation of strengths for the brand or the trademark.  This allows the selection of a specific royalty rate attributable to the asset.
  • Estimating the remaining useful life of the asset.
  • Determining the appropriate growth rate for the associated revenues.
  • Establishing a suitable discount rate, which takes into account all risk factors.
  • Using the above information, a royalty rate for the brand is applied to projected sales to quantify the earnings or cash flow.  The net present value of future earnings is then determined by applying the previously determined discount rate

Examples of Complex Intellectual Property Valuations Preformed by Arthur Consulting Group

  • A valuation involving eight major trade names for one of the largest group of apparel specialty stores in the United States.
  • Valuing global proprietary technology, including engineering drawings and computer guided manufacturing processes of a leading worldwide apparel maker.
  • Isolation of the value of operating system software, distinct from firmware and hardware, for the leading maker of visual computing systems for technical, scientific, and corporate applications.
  • A valuation of the trade names, trademarks, and the secret formulae of a Brazilian pharmaceutical company for a multinational pharmaceutical firm.
  • Valuing local origination programming and news and graphics libraries of several major market affiliates of national television networks.
  • A valuation of engineering process drawings for a major oil & gas firm in its acquisition of a regional specialty chemicals producer.
  • Author of a position paper for the IRS on the valuation of franchises.

WHAT EVENTS MIGHT “TRIGGER” THE NEED FOR THIS TYPE OF VALUATION?

  • Acquisition of a Company.  When intellectual property is an important component of an acquisition target, a valuation will help establish the fair price, and support sales price negotiations.
  • Litigation.  Litigation may change or threaten the ownership of intellectual property.  Valuation for litigation purposes includes bankruptcy, breach of contract, patent infringement, business interruption, death of principal, martial dissolution, minority stockholder rights, and others.
  • Licensing or Franchise Agreements.  Appropriate royalty rates must be established in conjunction with the use, license, or franchise of intellectual property.
  • Lending Decisions.  Some lenders typically require an independent appraisal for cash flow-based financing or for intellectual property pledged as collateral against the loan or credit line.
  • Charitable Contributions.  Charitable contribution of intangible assets worth over $5,000 requires independent valuation under Section 170 of the Internal Revenue Code.
  • Business Valuation.  When a partnership or corporation is formed, the valuation of contributed intellectual property is instrumental in determining the value of each founder’s share.
  • Purchase Price Allocation.  Intellectual property may be among the assets of an acquisition.  The allocation of value to the underlying assets – both tangible – establishes the acquiring firm’s associated basis, depreciation and amortization.  Some intellectual property is eligible for favorable treatment under IRC Section 197, which governs this issue.

 

 

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