Valuation of Non-Traditional IP Assets
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In the Intellectual Property (IP) context, Trademarks, Patents, Trade Secrets, and Copyrights are the four types of IP that can be protected. Those can also be categorized as the traditional IP types. However, License agreements often list other forms of IP, i.e. Know-Hows, Processes, Databases, and others. It is important to understand what those non-traditional types of IP are, and how to evaluate them.
What are non-traditional IP assets?
In contrast with the well-known and defined Trademarks or Patents, non-traditional IP assets are often more abstract, harder to define, and may not always have formal legal protections but still hold significant value for a business. They typically contribute to a company’s competitive advantage, operational efficiency, or ability to innovate. Below we have gathered some examples of non-traditional marketing and technical intangibles:
Non-traditional Marketing intangibles:
- Artificial Intelligence Creations: Legal recognition is evolving around IP rights related to AI-generated works, potentially giving ownership to the creator or the AI system itself.
- Domain Names: Website addresses that can have Brand value and legal protections.
- Holograms: 3D visual representations tied to Brands.
- Labels: Identifications of the products originating from specific locations known for their quality (e.g., Champagne).
- Sound Marks: Distinctive sounds associated with a brand (e.g., the MGM lion roar).
- Trade Dress: The overall appearance of a product or its packaging (e.g., shapes, colors, textures).
Non-traditional Manufacturing/Technical intangibles:
- Databases, Algorithms, and Software: Proprietary data sets, databases, and/or customer information. While software usually can be categorized under Trade Secret or Copyright, sometimes it can also be considered a unique IP type.
- Formulas: Specific compositions, usually chemical; Most common in pharmaceuticals, cosmetics, or agricultural products.
- Know-How: Any operational knowledge, practices, and proprietary business methods developed internally over time that represent the company’s expertise.
- Process Patents: The specific methods or processes of creating a product, such as chemical manufacturing techniques or pharmaceutical formulation processes.
- Technical Drawings or Schematics: Confidential IP that includes detailed diagrams and plans of technical systems.
- Utility Models: Technical innovations that are incremental and don’t meet the criteria of full Patents (e.g., minor improvements in tools or devices).
The valuation of non-traditional IP
Unlike Patents or Trademarks, many non-traditional IP assets don’t have strict legal protections but are instead maintained through confidentiality or exclusivity. Since these assets are often less tangible and lack market comparables, their valuation can be subjective and quite complex. It is essential not to forget the strategic importance as well – non-traditional IP often provides significant competitive advantages that are key to a company’s success, particularly in tech, service, or data-driven industries. To evaluate a non-traditional IP asset, it is important to understand several aspects:
Valuation method – It is crucial to choose the appropriate valuation method: The income approach, which calculates the net present value of expected future income from the asset, is often preferred for non-traditional IP. The market approach, while challenging due to a lack of direct comparables, looks at similar transactions in the market to guide valuation. The cost approach estimates how much it would cost to recreate or replace the non-traditional IP. Although this may be less applicable to unique or complex assets, it can be useful when providing a baseline value.
The nature of asset – Non-traditional IP can consist of proprietary algorithms, data sets, or internally developed software. The value of these assets often comes from their uniqueness or the competitive advantage they provide. Furthermore, it is important to understand the legal standing of the asset, i.e. the ownership rights or protection laws, which directly influence the value of your IP as well.
Market comparables – The usual lack of direct market comparables in terms of non-traditional IP often makes the benchmarking process more difficult. Valuers must turn to indirect comparables or look at similar assets in other industries to estimate a fair market value. Furthermore, market trends and the dynamics of specific industries also affect the value of non-traditional IPs.
The income generation potential – The ability of the non-traditional IP to generate income is a key factor in its valuation. For example, a proprietary algorithm might lead to business efficiencies or deliver added value to customers. It is important to consider the revenue streams, cost savings, or increased margins that the asset might create. Additionally, estimating future cash flows that can be attributed to the IP asset is critical to determining its value, including how well the asset integrates with the business model and drives revenue. The ability to license or monetize the IP is another factor that can increase its value. Understanding how the IP can be leveraged beyond internal use, such as through partnerships or licensing agreements, is key to accurately assessing its worth.
Competitive advantage – Non-traditional IP often plays a strategic role in creating competitive advantages. For instance, an algorithm that greatly enhances a company’s services can be very valuable, even if it doesn’t directly generate revenue. These assets often derive value from how they complement other business assets, creating synergies that enhance the overall worth of the company.
IP Lifespan and associated risks – Obsolescence risk is a significant concern, especially for assets like software or algorithms, which can quickly become outdated due to technological advancements or regulatory changes. Valuers need to assess the expected useful life of the asset. External risks, such as competition or changes in the regulatory environment, can also impact the long-term value of the IP.
Legal factors – Legal and regulatory factors can play a major role in valuing non-traditional IP. In some industries, such as pharmaceuticals or finance, proprietary data or algorithms may need to comply with specific regulatory requirements, which can affect their valuation.
In summary, non-traditional intellectual property assets, play a critical role in enhancing a company’s competitive edge and driving innovation. Their valuation is complex, requiring a deep understanding of the asset’s unique characteristics such as nature, income-generating potential, and strategic role, along with market and legal considerations. The chosen valuation method should account for these complexities, often requiring specialized expertise to arrive at an accurate and fair value.
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Sources:
https://www.wipo.int/sme/en/ip-valuation.html
https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/seiler.pdf