Thursday, 13 March 2014
IP Valuation: My Two Cents, for What It’s Worth
This month, a regular gathering of Kenyan IP enthusiasts selected IP Valuation as the topic of discussion. The topic reminded this Leo of recent IPKat posts, here here, and here, the last of which links to its own nugget of spectacular value – a free 104-page book on IP Valuation, here.
In theory, IP Valuation seems as straightforward as valuing any other asset. The IP enthusiasts discussed and explained the Cost Approach, the Market Approach, the Income Approach, and the Direct Approach. Indeed these are so well know that they feature on the Wikipedia page for IP Valuation. All very digestible and logical.
When it comes to IP Valuations in practice, however, this Leo is quite the scaredy-kat.
A finance expert recently stated, quite casually, that IP valuation is no more difficult than valuing any other asset. But can this be the case? Unlike most assets, an IP right is entirely separable from the product to which it pertains. The patent is not the device it describes, the trademark is not the logo, and the copyright is not the drawing. You can use a device, logo, or drawing entirely apart from any IP right that may cover it, and in any case these IP rights don't even grant any right to sell or use the product/logo/drawing/etc. Indeed you can even sell a product but not the IP rights covering that product, and vice versa.
Instead, the IP rights grant the right to stop others from acting. Accordingly, IP valuation is really the process of answering the question: “of what value to a potential buyer is the right to exclude competitors from doing _______?” The blank represents the right(s) provided by the IPR. This exclusionary right can have much more (or much less) value than the product itself.
Dramatic examples of IP valuation show it to be highly subjective, to the point of being unreliable. A portion of the Kodak patent portfolio (1700 patents, to be exact) was originally valued at 2.2 Billion to 2.6 Billion USD. After a negative result in a court case, some deal-making, consortium building, and other
hocus pocus curious and interesting events
involving the portfolio, Kodak finally reaped just 94 Million USD, a mere 4% of
the initial valuation. The full story is told here.
This Leo wonders whether there was any consequence for the firm that was responsible for overvaluing an asset by over 2 Billion USD. Granted there were intervening events, but if there are no consequences for missing the mark (by a lot), they why do we bother with IP valuations at all? In the end, it probably boils down to building a reputation and trust for those doing the valuations.
An important note (since tax is one of two certainties in life) is that IP Valuation is important for tax purposes. Tax authorities in the United States and other developed countries regularly deal with IP assets in financial reports and tax returns. South Africa, too, appears to allow a deduction (here and here) from tax for certain IP assets. The Kenyan tax authority, KRA, has not made any (obvious) public announcements or guidelines for the treatment of IP assets. Perhaps this is due in part to the difficulty of valuing such IP. More likely it is indicative that most Kenyan tax filers do not report IP assets, so there is little or no need for such guidelines. Surely this is likely to change in the near future.