The Multitopic Blog

The trend of valuation of intangible assets in accordance with the valuation of physical and financial assets has continuously increased since the early 1980s. One possible reason for this increase is the market-to-book (M/B) value for companies. During the 1970s, the M/B ratio for the Standard & Poor 500 companies hovered around one; by 2000, the M/B ratio was over six. This means that in 2000 for every $6 of market value less than $1 was comprised of physical and financial assets while the remaining $5 (83.3%) was comprised of intangible assets.  For many companies, the ratio of intangible assets to physical and financial assets is considerably higher. Smith and Parr have calculated the following percentages of intangible assets for the following companies: Johnson & Johnson (87.9%); Proctor & Gamble (88.5%); Merck (93.5%); Microsoft (97.8%); and Yahoo! (98.9%).

In the context of acquisitions, sales, and joint ventures, intangible asset valuation is necessary to determine the value of a company to a buyer or seller and the value of partners’ contributions to collaborative undertakings.

The market power conferred by a patented process will provide value if other processes are not available to perform the same function. The more monopolistic power the intellectual property confers, the higher the value.   

If the financially troubled seller has experienced an interruption of its business, it will be more difficult to ascertain the value of the intellectual property. Potential purchasers will measure the value of the property by the income stream it produces. Accordingly, the value can dissolve if operations cease.

The courts generally accept valuations undertaken by more than one method, when the results of the different approaches lend credibility to the value proffered to the court.  Meaningful corroboration of valuation results is an integral part of any well-thought-out appraisal. Whenever possible, results should be corroborated against one or more benchmarks.  Valuation acquires an entirely new facet when the goal is to distribute a fair deal or a fair share to all the parties during mergers or acquisitions.  

A fair market value determination typically seeks to establish that feasible range of values within which a “win-win” outcome for both the transferor and the transferee may be achieved. Such an outcome only occurs if there is a feasible range of values between the seller’s floor and the buyer’s ceiling.

It is clear from the outset that Intellectual Property valuation is here to stay,  particularly in transactions where intellectual property assets comprise a significant portion of total value. While there is no clear methodology to assess or assign to an intellectual property asset a value, the objective of the very exercise is crystal clear. Keeping that in mind it is essential that the appropriate valuation technique be chosen. Corroboration is indeed the best method.  For instance, the valuation of a trademark in the apparel business could be corroborated against published industry-wide benchmarks. This comparison could be made by way of the appraised trademark value to firm total (tangible plus intangible) value ratio.