The sale price of your company increases or decreases with your intellectual property value. This is the price someone would pay specifically for your intellectual property.
What is Intellectual Property?
Intellectual property (IP) is one realm of property. It includes copyrights, trademarks, patents, trade secrets, and sometimes goodwill. We’ve covered copyrights and trademarks in prior posts. Unfortunately, we’re unable to go into too much depth about patents because we are not licensed to practice patent law. However, patents provide protections for the patent holders when it comes to ideas and inventions. Trade secrets are a special area of law. Trade secrets are pieces of knowledge or ideas that businesses desire to keep secret. For example, you would probably consider inventions and expansion plans as trade secrets. If something is public knowledge, it is not a trade secret. Furthermore, if it can be easily learned by a third party, it is not a trade secret. Goodwill is the value of your brand and reputation. All companies have some goodwill, but it is hard to measure.
How is Company Value Calculated?
Company value is very difficult to measure. Ultimately, it is worth what someone is willing to pay for it. Since that’s not a helpful sentence, we’ll give some further guidance. Generally, a business is worth its assets minus its liabilities. However, you don’t count only tangible assets. This calculation should include intellectual property, goodwill, and future cash flow as well. You’ll often discount goodwill and future cash flow to account for the owner’s departure. Usually, it is more straightforward to calculate liabilities. You’ll need to add up the net present cost of all anticipated future costs to running the company.
How do you Calculate Intellectual Property Value?
Here’s the toughest part. Calculating the value of intellectual property is seemingly guesswork. For example, what value can you place on your future expansion plans? This is where a lot of negotiation happens. I had a client sell her franchise, but refused to sell the expansion plans without additional compensation. Ultimately, the buyer agreed to the additional compensation. It was worth it to the buyer because my client’s plans were an incredibly valuable asset. In the end, the plans sold for more than the franchise itself. There are ways to evaluate your intellectual property value by comparing to similar IP. For example, if you have a software patent, you can see what other similar software patents are selling for or being licensed for.
Ways to Increase your Intellectual Property Value.
Even if the value is rather uncertain, there are ways to raise your intellectual property’s value. First, organization is your best friend. Disorganized IP is nearly worthless. If a perspective buyer can’t get a clear picture of your intellectual property, he or she will have a hard time placing a value on it. Second, you need to make an intellectual property plan. In an idea world, all of your intellectual property is made to pursue the same plan. You need to specify in your plan when and why you generate certain IP. Your plan should also specify the goals and location for any and all intellectual property. If anything doesn’t advance the goals of the company, it won’t be worth that much to a potential buyer. Third, registration is gold. Copyrights, trademarks, and patents are more uncertain if they’re not registered. Registration of these is a major hurdle to prove that these have value. There are, however, some trade secrets that could be patented that you wouldn’t want to patent. Fourth, you need to enforce your rights. You can have excellent copyrights or trademarks, but if you don’t enforce them, they’re next to worthless.
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