Property

The Current State of Valuing Intellectual Property Ownership of intellectual property has been the result of a rise in corporate valuations over the past couple of decades over the traditional value. This is due to many reasons that will be analyzed below. The increase in technology and the never ending technological advancements play a major role in this ownership. Having a clear understanding of the value in the intellectual property is crucial in managing the resources within a firm. There are many valuation methodologies that are used and three value maximization methods that are commonly used. Intellectual Property Intellectual Property is the creative things that come from one’s mind which property rights can be recognized. Intellectual property has many laws that allow owners of many businesses to be granted rights to direct types of assets from the company itself. The rights “usually give the creator an exclusive right over the use of his/her creation for a certain period of time” (WTO, 2010). The most common types of intellectual property may include trademarks, copyrights, certain design made by the company, and trade secret that are to be kept inside the business. The purpose of Intellectual property is to protect the ideas and originality of a person work. The purpose of the laws that are provided through this property is to “encourage new technologies, artistic expressions and inventions while promoting economic growth” (2010). Having the ability to do a good job that can be very productive to the economy and it be protected is what every individuals look forward to in a business. Once the productive effort of one’s mind is protected then more is likely to come in the future, which may include producing more jobs and better technology. How Intellectual Property is Used Intellectual property is the, “property that results from original creative thought, as patents, copyright material, and trademarks.” (Dictionary.com). Organizations use this to safeguard their ideas from infringement from other companies (Cornell University, 2010). In many cases, this gives the originating company a lead in a developing market or a late entry company an avenue to catch up to and possibly overtake lead companies in the market in capturing market share. Organizations use intellectual property for many reasons, another reason is to handicap the competition in some way by limiting who may work for the original company’s competitors. For example, Hewlett Packard is suing Oracle in an attempt to prohibit their ex-CEO, Mark Hurd, from joining that company. HP claims that Hurd’s new position at Oracle would force him to utilize various HP trade secrets as well as HP’s developing intellectual property (Associated Press, 2010). Finally, intellectual property can give organizations the critical time they need to develop a product while other organizations have to wait for the product patent to expire. Three Valuation Methods The three most commonly used methods for determining the value of intangible assets are the cost approach, market approach, and income approach. There are no absolute determining factors or industry norms that steer an appraiser to use one of the three valuation methodologies over the others. Each method has its pros and cons and the decision to utilize one or multiple methods depends on the context of the valuation taking place. The wide variety of intangible assets makes it difficult to assess the best valuation method overall. The exploitation of the asset is also a contributing factor. An appraiser would not be able to use the same method to value a licensing agreement for software the same as they would the outright sale of a customer list (King, 2003). Cost Approach One of the three key methods that are used for intellectual property valuation is the cost approach. “The cost approach seeks to determine the value of IP by aggregating the costs involved in its development.” (Drews, 2010) This approach deals with how much it would cost to reproduce or replace an asset. An investor will not agree to pay more for the asset than it would cost to replace it. This method is useful when trying to find the value and there is little to no economic activity to analyze. There are two types of cost under this approach and they are reproduction cost and replacement cost. Reproduction cost deals with the cost that is required to reproduce a replica of the asset. Replacement cost, on the other hand, represents the highest quantity a purchaser would pay for a precise asset. There are some advantages and disadvantages to using the cost approach when valuating intellectual property. A major drawback is that the historical cost may not contain valid information of what the future cash flow may be. This can hurt the purchaser in the long run if the calculations are not accurate. An advantage to this approach is that the requirements of data that are necessary to determine the IP’s value is kept to a minimum. Also, this approach is an efficient way to create a maximum price. There are many items that must be determined before an approach can be chosen, such as which assets need to be valued and what measurements are required to be taken. The cost approach is a valid method to use when dealing with tangible and intangible assets but it is important to ensure the correct method is being used to result in the most accurate valuation. Market Approach The market approach to valuation is taking a look at the fair market value of the business in question by using some historical data. It looks at selling prices of similar businesses recently being sold, business similar in product line, features, clientele, market growth and risks. Subsumed under the market approach are the Guideline Public Company Method and Comparative transaction methods. A comparison is completed based on the data collected. A property value price per unit can then be established when the list of properties are compared to the one being purchased. A disadvantage to this approach is that it can be very difficult to find companies/transactions that are similar to one another. This is required in order to make the most accurate value price per unit. This task can be almost impossible to complete because it is extremely hard to find these comparable assets. In evaluating the market approach to the acquisition of the Czech Republic by Acme Industries we must consider the factors, which positively impact advantages in technology, regulations, and capital markets. Acme Industries with domestic ties and relationships in the US would position itself for global strength and market share by acquiring the Czech Republic firm. With the overall goal to gain access to strategic proprietary assets, market power and dominance, synergism in local/global operations throughout the industry, diversification, and the exploration of financial opportunities and increased size and revenue, am immediate aggressive pursuit of the Czech firm is both necessary and vital for expansion. Income Approach Valuation from the income perspective can and does take many forms. Since income is the basis of any company’s growth and their (raison d'être), this materializes in very many ways. Annual dividends, growth in the value of the company, return on investments are just some of the ways. Quantifying this present value of future income streams is essentially what this valuation method is all about. This futuristic but realistic look is tantamount to taking a snapshot of the company at some point in time to come. What will it look like, how might it grow, how might it function operationally, and what is its capacity to generate revenue over time. Collins and King (2010) suggest that merely calculating the asset value of a company is inadequate as balance sheet figures provides a narrow view of the company’s financial health. What they suggest as a better measure is to look at the company’s Interest Before Depreciation and Interest and Tax (IBDIT). The rationale for this is that they represent the true picture of the company as financial records are averaged over a five year, three year and current year. This seemingly technical but useful method is based on very cogent analyses of the history and projected growth which include plans for capital projects, major salary increases and growth of future investment. In short, it is the practical application of a capital earning method that makes it feasible. The capital earnings method is based on the following: 1. Current interest rates on loans or mortgages used in acquiring the company. 2. Cash flow out of the business (equity investment) for which is anticipated an expected rate of return (ROI), and 3. Risk factors involved in the purchase or expansion. Similarities and Differences The three valuation methods used to determine the worth of intangible assets or intellectual property serve the same purpose but travel a different path to reach an estimate. The goal of an appraiser is to apply a monetary value or worth to an asset. These methods assist companies in establishing profitability and market dominance. In the case of intangible assets, economic concepts and legal concepts are brought together to form a value estimate. The three valuation methods provide a process to determine a concrete valuation, one that is not abstract and is derived according to the specific time, place, and circumstance that the asset is being assessed (King, 2003). While the three methods are used to reach the same goal, very different processes and analysis techniques are used with each one. The market approach depends on the ability to evaluate transactions on the market for a comparable asset of the one being valued. The cost approach on the other hand assumes that a relationship lies between the cost of replacing or producing an asset and its value. Lastly, the income method, which is the most robust technique, is grounded in past economic benefits as well as the estimation of future economic returns (King, 2003). The thing that differentiates the three valuation methods discussed is their standards. They employ different standards of value to arrive at what a company is worth. Another important point is that the standard applied is based on who is looking or doing the valuation and what the main objective is. Individuals have different interests and would be interested in what motivates them. The income approach might appeal to investors whose primary interest is the financial return. Someone in real estate might be more inclined to look at the fair market value. The cost approach might be more appealing to There are several common characteristics or features of these valuation methods that might not be discerned at first glance. For example, inherent in market-based valuation are costs, sales, comparisons, and income. Likewise, in the income approach value is affected by sales and costs. In the cost approach often do not indicate market value and must consider other factors like the fair market value. Cost is historical as it includes initial price but must also take into account replacement of assets and future value of assets. In this situation it is the market value that underscores the worth or value. It can be said that valuation is the complex set of interrelations of approaches for the purpose of arriving at an estimated value. Current State of Valuing Intellectual Property Organizations can place various values on property and other tangible resources; however, it is difficult to place a value on intellectual property. How is it possible to accurately place value on an idea or concept' Valuing intellectual property in this economic climate requires significant research based on Market research, Cost, and past and future estimates (King, 2003). The valuation of these intangibles also must be researched on the international level. For example, an idea of a high capacity water purifying system would be valued much greater in countries that have major flooding issues than areas that have water purifying centers already set up. The flooding currently going on in Pakistan has mixed waste water with drinking water and not enough drinking water is available. People are getting sick and dying because they are drinking contaminated water. In this scenario, this type of product in this location would be greatly valued. The valuation of intellectual property, just as real property, is affected by the competitive environment, technological change, and regulatory change (Business Finance for the Multinational Corporation, 2007). Due to many products being able to be introduced on an international level, organizations also must value intellectual property along with target countries regulations and international trends. Using the High Capacity water purifying system scenario, if such a system was not legal or could not be imported into Pakistan, then the value of the product in that nation would be greatly reduced even though the need of such an item would be in high demand. Finally, the need to be able to value intellectual property accurately can aid companies not only value their assets but also determine what ideas will be beneficial to invest in. The three methods discussed are great foundations in order to get a more accurate determination of the value. However, as with most intangibles, the value is truly determined by the beholder. References Allaw.com. (2010). What is Intellectual Property'. Retrieved form www.allaw.com/topics_ property/. Associate Press. (2010). HP sues ex-ceo Hurd after he takes job at Oracle, retrieved from http://www.msnbc.msn.com/id/39042088/ns/business-us_business/. Cornell University Law School: Legal Information Institute. (2010). Intellectual property. Retrieved from http://topics.law.cornell.edu/wex /intellectual_property. Collins, M., & King, J. (2010). Valuation formulas: The income method. Retrieved from http://www.canadaone.com/tools/buy_a_biz/section2f.html. Drews, D. (2010). Intellectual property valuation techniques. Retrieved from http://www.ipmetrics.net/IPVT.pdf. Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2007). Business Finance for the Multinational Corporation. 11th ed. Boston, Massachusetts: Pearson Custom Publishing. Intellectual Property. (n.d.). Dictionary.com. Retrieved from http://dictionary.reference.com/browse/ intellectual +property. King, K. (2003). The value of intellectual property, intangible assets and goodwill. Retrieved from http://www.wipo.int/sme/en/documents /value_ip_intangible_assets.htm. World Trade Organization (2010). What are intellectual property rights' Retrieved from www.wto.org/english/tratop_e/trips_e/intel1_e.htm.