SEPARATING IP VALUE FROM BUSINESS VALUE
There are many reasons to separately value IP apart from business enterprise value. Data from 2020 shows that 90% of the market value of the S&P 500 is comprised of IP. That translates to $21 trillion in this index alone. With the staggering AI investments since 2020, this IP amount is literally off the charts.
- For valuable IP developed by the business owner, he/she may want to place the IP in a separate entity and “rent” the IP to the corpus. To accomplish this, an arm’s length agreement should be derived from an appropriate royalty or licensing rate. Warren Buffet is best known for leasing assets to his corporations. Of course, in order to execute an IPO, the IP should then be placed on the corporate balance sheet at a fair market value.
- Another important consideration is using IP value to support investment in an early-stage firm. Key investors will want some quantitative assessment to justify their capital input.
- An innovation-driven company that is selling the business wants buyers to understand the worth of their most valuable assets. Multiples can increase depending upon how the IP is analyzed and valued.
- IP value is needed for licensing deals. Often, the IP is incubated in university programs that do not participate in the actual exploitation of the IP in a business environment.
- Litigation over ownership and rights to IP is another clear example of the need for IP valuation. Dispute resolution may hinge on the damages estimates to one’s IP.
- Before the IP is fully developed and potential applications/markets are explored, the IP maybe transferred to a completely separate entity with different shareholders. A valuation is required to determine if the transfer results in a taxable event.