Valuation of intellectual property assets

The valuation of intellectual property assets is the exercise of assigning a monetary value to a patent, a trade mark, software, a design or a portfolio of rights, with a view to an assignment, a licence, a contribution in kind to a company, a financing, an entry in the accounts or the calculation of damages. No statutory provision prescribes a method. Practice relies on accounting standards, on ISO 10668 for brand valuation and on three recognised approaches.

The three approaches

The cost approach takes the historical cost of creating the asset or the cost of reproducing it, which suits software and recent trade marks but ignores the asset’s capacity to generate income. The market approach compares the asset with transactions involving similar rights, which requires comparable data that is rarely public outside standard essential patent licences. The income approach discounts the future cash flows attributable to the asset. Its most common variant is the relief from royalty method, which estimates what the business would have to pay to exploit the asset under licence if it did not own it, by applying a market royalty rate to forecast turnover.

Legal drivers of value

The value of a title depends first on its legal robustness. For a patent, what matters is the remaining term, the scope of the claims, the existence of prior art threatening validity, the territories covered and how easily infringement can be detected. For a trade mark, what matters is distinctiveness, the range of goods, services and territories, reputation and the absence of any risk of revocation. Licences granted, pledges, pending litigation and co-ownership reduce value or complicate transfer. Valuation therefore presupposes a prior legal review, and a title whose chain of title is uncertain cannot be valued with confidence.

Uses of valuation

In the accounts, acquired intangible assets are recorded at cost and may be subject to amortisation, whereas internally generated assets are in principle not recognised, which explains the gap between book value and economic value. Valuation is used to set the price of an assignment, the rate of a licence, the value of a contribution in kind reviewed by the contribution auditor, the base of a pledge and, in litigation, the damages due for infringement by reference to the royalty that would have been payable.

Key points

The valuation of an intellectual property asset relies on the cost, market or income approach, the last of these, and in particular the relief from royalty method, being the most widely used. Value depends above all on the validity, scope and ownership of the right. Carry out a legal review before any valuation and document the assumptions adopted, which will be scrutinised by the contribution auditor, the tax authorities or the court.

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This glossary entry is general in scope and does not constitute legal advice.

Dhenne Avocats litigates patent disputes before the Paris Judicial Court, the Paris Court of Appeal and the Unified Patent Court. When the question arises in a real case, the right moment is almost always before proceedings are issued.

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