When buying a business, you more than likely purchase all of its assets as well, in order to avoid duplicating your efforts. In addition, you also purchase its goodwill and intellectual property. Valuing those assets is not as easy as valuing inventory, however.
This article focuses on the purchasing and valuing of intellectual property as part of a business acquisition. These intangible assets, such as patents, copyrights and trademarks, can add a significant amount of value to the business. Failing to include them in the purchase of an existing business could cause it to fail in the future since these assets are often the ones that provide the most revenue for the company.
What makes intellectual property so valuable?
A major part of the purchase price of the business you wish to buy probably centers on its intellectual property. Each of these assets provides a different value to the business as indicated below:
- Product design rights allow a company to appropriately price its products based on unique offerings to the consumer base.
- Patents and other registered designs prevent other companies from marketing similar products, which allow the company you wish to purchase to keep its edge in the market.
- A business with the rights to designs often works with third parties who manufacture and sell the finished products, which, in turn, provides a stream of income.
In order to make sure you pay a fair price for the company's IP, you will need to obtain a valuation of it.
What methods do companies commonly use to value IP?
No one valuation method will work for every company, which is why it's important to look at a number of factors when determining the best way to come up with a fair price for the IP of the company you wish to purchase. For instance, consider the following common methods of valuation:
- The market-value approach looks at how a product does in its market and compares it to how well similar products do. Obtaining all of the data needed for this method may be problematic and might not give you an accurate assessment of value.
- The income method examines the economic benefit of the IP currently and attempts to extrapolate how it will perform in the future.
- The cost-based method looks at the company's costs of creation and development, which you shouldn't have to pay if your purchase includes the intellectual property rights since all of the groundwork is complete.
Choosing the valuation method that would work best in your circumstances may not be easy. It may take some additional research to be sure that the right steps are taken in order to pay a fair price for the company's intellectual property rights.