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Traditional View of Intellectual Property

The traditional view of intellectual property, fostered and upheld by both the accounting and legal fraternities, is that intellectual property comprises patents, trademarks (trade marks), designs and copyright, and all other species of intellectual property that do not fall into one of these four categories are filed under the umbrella term “goodwill”.

Goodwill, despite attempts to define it, is a rather vague term; within the accounting framework, it tends to denote a balancing figure, being the amount of a business’s value that cannot be explained by its tangible assets alone. For this reason, sales of business tend to attribute regrettably large portions of the sale price to such goodwill.

Legally, courts have defined goodwill as the totality of things that attract and retain custom for a business.

Commercial Understanding of Intellectual Property

The legal definition of goodwill does not do much to help understand the nature and content of the intangible assets filed away under the catchall of goodwill. What exactly is contained in this “totality”? Why does Business A attract and retain more customers than Business B, when they have, ostensibly, a substantially identical product?

A commercial view of intellectual property is necessarily more broad, and seeks to answer questions of this kind. It examines and interrogates all species of intangible asset, whether afforded statutory protection or not, and in so doing, drills down and contextualises a business’s intellectual capital.

Such a commercial view may, for example, determine that Business A beats Business B in customer attraction and retention for the same product as a result of its supply chain management algorithms, customer relationship management systems, online presence and user interface, software, staff training methodologies etc. To summarise such assets, which are undoubtedly intellectual property assets, as goodwill, is misleading at best, and misrepresentative at worst.

Appraisal of intangible assets through a commercial lens does not discount the essential and legal protection afforded by certain classes of IP; on the contrary, a legal monopoly conferred by an intangible asset is an important component in the determination of its commercial value. Legal considerations of this kind are, however, just one element in a complex tapestry of IP valuation; while requiring intricate understanding of the legal exigencies of intellectual property, the valuation must ultimately determine the intangibles’ potential for revenue generation within the broader business schema as a whole.

Reasons To Conduct An Intellectual Property Valuation

Reasons to undertake an IP valuation are constantly evolving. The following, by no means an exhaustive list, are among such reasons:

• Purchase price allocation (often with favourable taxation consequences for the purchaser) in sale of business/shares;
• Onshore/offshore taxation structuring/restructuring;
• Definition of nature and value of intangible assets (due diligence);
• IAS (International accounting Standards) / IFRS (International Financial Reporting Standards) compliance;
• Emerging ISO (International Organization for Standardization) standard compliance;
• IP ring-fencing (to insulate IP from unrelated business risk, protection in the event of insolvency);
• ROI (return on investment) calculations on marketing and IP-protection spend (to be included in annual reports or bolster share price);
• Capitalisation of IP assets (i.e. write-off for tax purposes – jurisdiction dependent, not applicable in the UK);
• In the course of start-up funding / share allocation for VC’s/angel investors etc, either as a marketing tool to attract funding, or as a means to allocate shares based on funding received;
• Negotiation/substantiation of reasonable royalty rates in licensing/franchising transactions
• Litigation:
  • Calculation and justification of damages or reasonable royalties in lieu of damages; and
  • Expert opinion on the reliability/veracity of past valuations;
  • Use of IP in debt-financing / gearing / hypothecation / securitisation transactions;
• Insolvency:
  • Pre-pack administration / insolvency; and
  • Separating / spinning-off of robust IP from underlying, failed enterprise; and
  • Avoidance of negative tax consequences of “goodwill” through proper definition of brand support intangibles.