Corporate executives and entrepreneurs alike must take an active role in extracting value from their intellectual assets. They need to be able to effectively leverage the knowledge, trade secrets, patents, technologies, trademarks, structures and processes that are critical to their operations.
We frequently are engaged to value intellectual property assets for financial reporting processes, including evaluation of value of naming rights, to measuring impairment of intangible assets for depreciation purposes.
Formalizing ownership of patents, trademarks, copyrights and other intellectual property provides a barrier to entry for competitors, freedom to operate, and a market differentiator. Beyond the ownership benefits of formalized intellectual property (IP) assets, there are a number of financial benefits as well. Patents, trademarks, and copyrights are assets with a determinable value, and as such, they can be used to support financial transactions, just like any other asset.
Generally Accepted Accounting Principles (GAAP) do not allow the total costs of internally developed intellectual property to be capitalized as an asset. While certain costs like the cost of patent registration, documentation costs, and other legal fees related to the application may be capitalized, the cost of research and development cannot. Acquired intellectual property, however, is recorded upon acquisition at “fair value”.
Organizations can maintain, however, a separate schedule of owned intellectual property assets, including an estimate of their fair value as a supplemental schedule to their financial statements. Depending on the organizations capital strategy, this can help support lending requests, negotiations with equity partners, and exit planning.
Patents, trademarks, and copyrights all support acquisition of the company for more than book value. Acquired intellectual property may be capitalized at fair value upon acquisition, so the balance sheet of the post-transaction entity will be stronger. The acquiring organization will have further justification to support the purchase price.
Additionally, patents, trademarks, and copyrights demonstrate an organizational maturity that is attractive to potential suitors. The registration process requires documentation and discipline, both indicators that the organization has procedures and focus to accomplish their objectives.
A valuation of the IP portfolio is an essential component in the determination of the organization’s value to support a business sale (purchase price), new partnership (amount of contributed capital), or other equity event.
Patents, trademarks, and copyrights are assets that may be used as collateral to support a financing event. A valuation is typically required to support the transaction amount and terms.
There are many tax planning and compliance situations that require valuation of intellectual property assets, from relatively simple to complex.
In a business combination event, identifiable IP assets are recorded at their current fair value; a valuation of each asset is used to determine this amount. In certain instances, an annual valuation is required to determine if there is any impairment of the asset that would require a write-down of the asset.
Public companies require IP valuations to support financial statement preparation and presentation. In litigation, the valuation of an IP asset, and any related impairment to that asset, are key to determination of damages in the matter.
Example Engagement: Unauthorized Seller
A greeting card company identified products sold on the internet which included their copyrighted images. Through their attorneys they contacted the seller, and engaged us to determine if the seller was compliant with the cease and desist letter, and to determine the source of the unauthorized products. Under the terms of the letter, the seller was to immediately discontinue sales of the product, and destroy the remaining stock with unauthorized images.
We visited the seller’s warehouse in southern Florida, and asked for purchase records, as well as inventory records. Notably, while the inventory and purchase records reflected no new purchases, the inventory records showed a slow, constant reduction since the cease and desist order, indicating the seller was depleting his inventory through sales rather than by immediate destruction of the remaining inventory. We reviewed our findings with counsel, we moved for disgorgement of the sales proceeds and further sanctions against the seller.