Six Reasons to Value IP
Hoffman Clark is frequently asked to evaluate intellectual property (“IP”) assets for a variety of reasons. Requests for IP valuations often come from the IP asset owner or from the company that is considering, or has completed, a transaction with the IP owner – such as a buyer, licensee, or creditor. IP valuations may also serve the informational needs of legal counsel, auditors, or government regulators.
IP valuations are necessary for both transactional purposes and notational purposes. It is important to know that the purpose of the valuation may affect the conclusion of value. A transactional valuation usually involves a negotiation between parties, a transfer of legal rights (e.g. sale or licensing), and a transfer of money or other valuable consideration. On the other hand, a notational valuation is performed when an IP asset does not actually transfer (the transaction is already complete or it is not yet contemplated). Such valuations are usually performed for tax planning or compliance, regulatory compliance, and financial reporting purposes.
Litigation valuations may be either transactional or notational depending on whether or not there is an actual transfer of the ownership of an IP asset. If the decision of the trier-of-fact results in a transfer, it is transactional. If the decision results in a monetary damages award, it is notational.
There are many reasons why a valuation analyst may be asked to estimate the value of IP assets. This article summarizes six categories of common reasons to value IP.
An IP evaluation can be useful in negotiating, structuring, and pricing the arm’s-length sale or licensing of an IP asset or a portfolio of assets. An appraisal can also serve as an independent assessment of the pricing for the transfer of an IP asset between wholly-owned subsidiaries (or between unequally-owned subsidiaries) of a corporation. The appraisal can serve as bases for calculating an exchange ratio between two owners for two individual IP portfolios or measuring equity apportionments in a new business enterprise or joint venture when the parties contribute IP assets. An IP valuation may also be used to measure an asset distribution in a liquidating business enterprise.
IP assets can be used as the collateral in either a cash flow-based or an asset-based debt financing. An IP appraisal is often required for the collateralization and securitization of IP assets used in these financing arrangements. The IP evaluation can also be useful when arranging the sale/license-back financing of an IP asset.
3. Tax Planning and Compliance
Tax planning and compliance is a category that has many different IP valuation requirements. For example, IP appraisals are used when forming an IP holding company and structuring an intercompany IP asset license to the taxpayer’s operating companies. An IP appraisal in often necessary when performing income tax basis purchase price allocations in a taxable business acquisition (e.g., a Section 1060 asset acquisition). The IP appraisal can be used to quantify the amount of the amortization deduction for a purchased IP asset. Other tax-related reasons to value IP include valuing a built-in gain tax deferral upon the taxpayer election to convert from C corporation to S corporation, supporting a charitable contribution deduction, and defending against a number of Internal Revenue Service allegations.
4. Regulatory and Corporate
Some industries are subject to more regulatory compliance requirements, and the need for more IP asset valuations, than others. Healthcare, for example, is an industry in which IP asset valuations are common – partly due to many transactions between for-profit and not-for-profit entities that typically involve regulatory compliance issues. IP valuations are used to estimate the fair market value of IP assets in the sale, licensing, or other transfer between for-profit and not-for-profit entities. Corporate governance issues many also require an IP valuation. These issues range from assessing the adequacy of insurance coverage for owned or licensed IP assets, to defending against infringement, misappropriation, other torts, breach of contract, and other wrongful acts on IP assets.
5. Financial Reporting
IP appraisals are essential in the preparation of acquisition accounting allocations among acquired tangible and intangible assets and the testing for goodwill impairment under current fair value reporting accounting standards. In bankruptcy and reorganization matters, IP valuations are used in preparing the post-bankruptcy fresh-start accounting for the emerging entity.
6. Litigation and Expert Witness Testimony
IP evaluation expertise is essential in calculating lost profits, reasonable royalty, or other economic damages in IP infringement and other tort claims. Measuring lost profits or other economic damages in breach of license and non-compete/nondisclosure agreement contracts also requires IP evaluation skills.
This article has summarized six key categories of reasons why a valuation analyst may be asked to conduct an IP asset valuation. There are, of course, other reasons to value IP.
For more information about our IP valuation services, please contact us directly.