What might your IP be worth

‘Your IP could be worth millions’ is an exciting sentence, and an incomplete one. Which rights, used by whom, on what assumptions? A valuation is only as useful as the reasoning behind the number. The number alone does not tell you whether an offer is fair or whether a buyer exists.

Identify the thing behind the estimate

A business may use a name, photographs, software, confidential know-how and licensed material together. Those elements do not automatically belong to the same owner or earn separate income. Before you ask for a number, check that the asset passes WIPO's basic tests. 1

1. You can identify it. It has a clear description that separates it from the rest of the business.
2. You can prove it exists. Registration certificates, agreements, licenses or entries in your accounts show it.
3. It is legally protected, and that protection can be enforced in court.
4. It earns its own income. You can separate its income from the income of the rest of the business.

Imagine a successful training course. Its revenue comes partly from the written lessons, and partly from the teacher's reputation, live delivery, a mailing list and customer support. A buyer of the copyright in the lessons gets none of the rest. Count the whole course income as the value of that one copyright and you have hidden the biggest assumption in the estimate.

Run an IP audit first

WIPO recommends gathering the information a valuation needs through an event-driven IP audit. 1 Do one before you license, before you talk to investors or lenders, and before you talk to a buyer or partner. Work through these questions: 3

• What IP do you have now, and what could you still protect?
• Can you prove you own each key asset?
• Who else can use it, and on what terms? List joint owners and every license you have granted.
• Does anyone else have a claim to it, such as an investor or a lender?
• Does your business rely on someone else's IP?

Expect to be asked for this: many lenders require this due diligence before they hand over any money. 3

Three methods, three questions

WIPO describes three valuation methods. 1

• Income: How much income will the asset earn, adjusted to its present-day value? This is the most commonly used method. It works best when the asset already has positive cash flows you can forecast.
• Market: What did someone actually pay for rights to a similar asset in comparable circumstances? It is simple and grounded in real deals, and it is often used to set approximate royalty rates.
• Cost: What would it cost to create a similar or identical asset? It suits assets that are easy to reproduce and whose benefits are hard to measure. It ignores wasted costs and anything unique about the asset.

Challenge each method with its own question. For income: what does the forecast assume about customers who have not bought yet? For market: did the "comparable" deal include exclusivity, support or territory that your offer does not? For cost: did the high development spend ever produce demand? These questions make the assumptions visible. They are not a reason to give up on valuation.

Ask for a range, not a headline number

Suppose a proposed license pays only if your partner launches a product. Work out three cases: a delayed launch, modest sales and a strong result. The differences show which assumptions drive the outcome. If changing one optimistic assumption collapses the estimate, put that on the table in the negotiation, not in a footnote no one reads.

Then check what limits the asset:

• Remaining term. IP rights end at an identifiable point in time, so the years left cap the income. 1
• Exclusivity already given away. An IP asset's value comes mainly from the owner's right to exclude competitors from using it. 1 An exclusive license you have already granted is exclusivity a buyer cannot get.
• Transferability. An asset should be able to be sold separately from the other assets of the business. 1 If it cannot, a buyer is really buying something else.

Keep value and price apart. Price is what a buyer is willing to pay in an arm's-length deal; value is calculated with disciplined, tested methods. 1 Your negotiating position and one buyer's needs move the price. Neither number is a verdict on your creative worth.

Decide what the valuation is for

WIPO lists the main uses: setting license terms and royalty rates, attracting investors and partners, mergers and acquisitions, securing financing, settling disputes and calculating damages, and internal management. 1 Name the use before the work starts. Ask the valuer what information they need, what the report can conclude, and which uses it supports. Do not reuse a report built for one purpose as proof for another. If the number will back a loan application or a damages claim in a dispute, hire a professional IP valuer and hand them your audit results before they begin.

Financing is real, but still early

WIPO describes IP financing as "growing but still largely nascent." 2 You can pledge IP as security for a loan or transfer the rights to the cash flows it earns, 2 and strong IP gives you an additional basis for seeking equity investment. 4 Banks taking IP as collateral is still not a widespread practice. 4 A lender that does accept it may put conditions on how you can use the IP in future, so read those terms before you sign. 2

A valuation does not oblige anyone to lend, and it does not create a buyer where none exists. Its real value is a better decision: what to offer, what to investigate, and whether an opportunity deserves more of your money. It is not the largest number you can persuade someone to print.