RICS draft guidance note - Valuation of Intellectual Property Rights, Guidance Note, 2nd ed

RICS draft guidance note - Valuation of IP Rights, 2nd edition

Assessing the functional and economic characteristics of the subject IP

Valuers should understand the nature and attributes of the subject intangible asset. This is important, as the functional, market and economic characteristics of IP influence its earnings capability, risk profile and value.

Valuers should also assess market factors. This guidance note restricts its commentary on market assessment to establishing the market potential of the subject IP and benchmarking with any comparable IP.

Unique characteristics of brand-, tech-, artistic- and data-IP are outlined in sections 4.1 to 4.4. Generic economic characteristics of IP are:

IP is generally not diminished by use, so although its useful economic life might be limited, it will not suffer from wear and tear.

IP can be simultaneously used by multiple parties and is therefore highly scalable.

The relationship between cost of creation and IP value need not be linear. This can result in a high risk of wasted investment, but it may also result in high upside potential.

It is generally more difficult to detect and prevent unauthorised use of IP than physical assets. This gives rise to the risk of freeloading, unless the IP owner is willing and able to enforce its rights.

Brand-IP

The legal rights that protect the name, design and visual identity of a brand are fundamental to its value. However, the legal rights are only partly responsible for generating cash flow. The ability of brand-IP to generate a higher price and/or higher volume than an unbranded product results from the extent to which it influences consumer attitudes and purchasing behaviour towards the underlying product or service.

The value of brand-IP therefore depends on its market strength and reputation, in addition to the owner's ability to prevent other parties from exploiting the reputation of the brand.

Market performance

Measures such as market share and historic performance can be indicators of the market strength of brand-IP. However, the market performance of a branded product can be driven by factors other than the strength of the brand-IP, for instance:

A high market share can result from barriers to entry rather than preference and loyalty towards the brand-IP.

Growth in market share might result from improved distribution capability rather than improvements in the consumer appeal of brand-IP.

Low share of a broadly defined market can disguise the strength of brand-IP in a niche market segment.

Measures of price premium and price elasticity can provide insight into the market strength of brand-IP, but these can result from superior product performance as well as from the appeal of the brand-IP.

The valuation of brand-IP requires an assessment of the economic contribution of the brand relative to other value drivers of the branded product. Some sophisticated, data-rich brand owners carry out econometric modelling or predictive research to isolate and quantify the impact of brand-IP relative to other factors that influence market performance. However, quantitative analysis of this sort is rarely available to valuers.

Brand equity

Market research and marketing professions use the term 'brand equity' to describe the aggregation of consumer attitudes towards a brand or the reputation of the brand. This is distinct from residual business goodwill because it is inextricably linked to the brand-IP. The benefits of brand equity follow the ownership, or right to use, the trademarks, copyright and designs with which it is associated.

In some jurisdictions, the definition of 'goodwill' at law differs from that in financial reporting. Terms such as 'brand strength' can be used instead of brand equity. A clear definition of brand-IP reduces the likelihood of confusion between a brand asset and goodwill.

Although brand equity is a generally accepted concept among marketers, it has no standardised definition. Most reputable brand equity models include measures of brand awareness, brand associations concerning quality and image, and the level of consumer affinity towards the brand.

Sophisticated brand owners collect attitudinal measures of this type through quantitative consumer research.

Where available, consumer research can provide an insightful input to the assessment of the market strength of the subject brand-IP. If no such data exists, the valuer should consider whether the purpose and scope of the valuation justifies such research to be commissioned.

Brand investment

The extent and duration of advertising expenditure can provide an indication of the market strength of brand-IP, particularly when tracked relative to competing brands. However, valuers should not assume that there is a linear relationship between brand investment and the value of brand-IP.

'Share of voice' is a term that describes a brand's level of advertising expenditure as a percentage of the total advertising expenditure of all competing brands.

Tech-IP

The earnings capability of tech-IP depends on functional and commercial utility. Incremental utility can result from the performance of the end product in which the IP is embedded, or from operating efficiencies resulting from the use of the IP.

The risk profile of tech-IP that is under development includes development risk, which takes account of:

the risk associated with each development hurdle

the risk of new competing technology coming into market and

the cumulative probability of successfully commercialising the technology.

This is discussed further in section 6.3.

Once commercialised, the earnings of tech-IP are subject to risks resulting from economic, market, legal, regulatory and technical factors.

Technology investment

The historic cost of developing tech-IP does not necessarily reflect its value, but can be a useful reference point. Research and development (R&D) costs that are accompanied by verified progression through development phases are likely to increase the value of the tech-IP through the progressive reduction in development risk.

Patent characteristics

For a patent to be granted, the invention that is the subject of the patent must (among other things) be novel and non-obvious. However, this does not imply that it:

is capable of use or manufacture

is marketable or

can be profitably exploited.

As a result, a patent requires ongoing legal costs, but provides no certainty of earnings.

In a patent document, it is necessary to some extent to disclose:

how the invention is or will be used

the product or process to which it relates and

the relevance of the claims of the patent to the utility of the product or process.

The extent of the increase in utility relative to existing technology influences the value of a patent. For example, within the pharmaceutical industry, the earnings potential of patents varies depending on whether they protect a compound, formulation, diagnostic method, method of treatment or manufacturing process. Other economic differences may arise depending on the indications covered within the scope of the claims, such as cancer, diabetes or colds and flu.

Within the commercial application of a patent, it is important to assess the breadth and relevance of its claims. Some products or processes will be protected by multiple patents. The economic contribution of each patent will be influenced by the relevance of its claims to the incremental commercial utility of the technology.

Where a patent's claims offer a wide scope of protection, this will tend to have commercial advantages, unless the increased breadth compromises the patent's validity and enforceability in light of prior art.

The ease of developing alternative technical solutions that circumvent a patent has a significant impact on its useful life and value. The likelihood of circumvention can be reduced by broad (and enforceable) patent claims or a portfolio of complementary patents.

Where pre-existing technologies exist, these can provide evidence of the ease of circumvention. Alternatively, patent network mapping, a review of published research, or the opinion of a technical expert can inform the likelihood of circumvention.

Even in situations where a patent appears unlikely to be profitable in use by the owner, it can block other parties from using infringing technology and thereby create earnings through deterrent licensing or litigation.

The useful economic life of a patent might be shorter than its legal life and cannot exceed the remaining term of protection. Patent specifications become publicly available, so, once the period of legal protection has expired, the patent claims can be used by other parties and surplus earnings will be eroded. However, the associated technology might maintain differentiation through other IP, such as trade secrets and trademarks.

A patent that:

  • provides a significant increase in utility
  • is difficult to design around
  • has a significant useful life and
  • is not difficult to enforce

is known as a 'blockbuster patent'.

The definition of the subject asset and basis of value should clarify whether a patent is valued on a stand-alone basis or under the assumption that it has access to related IP and other assets that are required for it to be commercialised. Strong patents with significant commercial utility are likely to be capable of license or sale in their own right, but weaker patents sometimes only have value when bundled with complementary assets.

Characteristics of trade secrets

As with other tech-IP, the value of trade secrets depends on their contribution to income generation or cost efficiency.

Unlike patents, trade secrets do not prevent other parties from using similar information if this is independently discovered. Hence, the incremental earnings generated by a trade secret are influenced by the likelihood of third parties reverse-engineering the information or creating similar know-how of their own. The competitive advantage resulting from trade secrets can be rapidly lost through inadvertent disclosure.

Costs associated with maintaining trade secrets are influenced by the methods used to protect them.

Artistic-IP

The method of monetising copyright is influenced by the nature of the underlying work, the market appeal of the work, the ability to distribute and control its use, and the remaining period of protection.

The ease of distributing copyright works through digital technology has increased revenue-generating opportunities and also the risk of unauthorised use. Thus, consideration should be given to the form in which the copyright is expressed.

Consideration should also be given as to whether legal opinion is required to establish whether a subject asset demonstrates the originality and creativity required to qualify for copyright protection in the relevant jurisdiction.

Data-IP

The value of data-IP can flow from incremental revenue or operating efficiencies resulting from enhancements in products, processes and/or marketing. The primary value driver is the utility of the data, in terms of the uplift that it can deliver to demand or efficiency.

Factors that can influence data utility and should be considered include:

length of the period covered by the data and the frequency of data points

breadth of the data in terms of both population and types of information

uniqueness of the data and how difficult it is to replicate

legal restrictions on the use of the data and

how recent the data is.

The quality and structure of data influences its readiness for use and its value. Relevant characteristics include whether it has been accurately captured and whether it is well ordered and maintained.

Utility of data-IP can increase significantly when it includes algorithms or other insights gained from the analysis of the underlying data.

The number of potential applications and/or users can also influence the value of data-IP.

Consideration should be given to any legal restrictions in the use of personal data and processed personal data. Such restrictions vary by jurisdiction

The useful economic life of data is influenced by the purpose of its use and can vary considerably. In some instances, only recent data is useful, while in other circumstances the length of data history is more important.

The ability of the data owner to prevent others from accessing the data and preventing inadvertent disclosure influences the economic life of the data and the risk associated with future earnings.