Monday, 19 July 2010

Valuation: an art, a science or an outcome?

"Brand Value: What is Your Company Really Worth?" is the title of a short article penned by Kelvin King (Senior Director, Valuation Consulting) for ACID (Anti Copying in Design) and published last month. In the course of his article he writes

"Valuation is an art more than a science and is an interdisciplinary study drawing upon law, economics, finance, accounting, and investment. It is rash to attempt any valuation adopting so called industry/sector norms in ignorance of the fundamental theoretical framework of valuation.

Valuation procedure is, essentially, a bringing together of the economic concept of value and the legal concept of property. The presence of an asset is a function of its ability to generate a return and the discount rate applied to that return. The cardinal rule of commercial valuation is; the value of something cannot be stated in the abstract; all that can be stated is the value of a thing in a particular place, at a particular time, in particular circumstances".
This is a useful reminder for businesses that depend on the creation or use of IP rights for their profitability. The literature tends to be written, often for good reason, in general terms, and business decision-makers -- particularly in SMEs -- are constantly reminded that their IP is valuable, that it is worth spending money on obtaining and protecting it, and so on. But when they want to dispose of an IP right, they are sometimes disappointed to discover how little value in monetary terms is placed on their rights in contrast with their own financial and emotional outlay. Expectations are raised, but the reality can be very disappointing -- and the truly valuable IP rights are always in someone else's sector, not one's own.

The value of an IP right can seem very small if there's no-one on hand to buy it, take a licence for it or indeed infringe it. It can also appear to grow in the hands of someone who can "talk it up", enhancing its commercial value by praising its functionality or marketing utility, which in turn emphasises the subjective and variable nature of the value of an IP right. In short, valuation may be neither an art nor a science but an outcome -- the result of interaction between interested parties, be they buyer and seller, licensor and licensee or borrower and lender.

1 comment:

Mary Adams said...

It's important to keep in mind that the highest and best use of most IP is when it is put to work inside a viable business model--not through a third party sale.

When I see management teams that look to external markets for validation of the "value" of their intellectual productive assets, I think of managers I knew when I was a lender decades ago. They were always surprised by how low the liquidation value was of the most important production equipment installed in their factories.

The lesson is that very few people will be able to extract as much value out of your production assets (both tangible and intangible) as you can. That's why the assets that end up getting sold are those for which the seller does not have a viable value creation strategy.