The value of Intellectual Property and what it’s worth to you
Understanding Intellectual Property
For a lot of innovative companies, IP (Intellectual Property) is a key value-driver. Despite this, many company owners are unaware of their intangible assets and, therefore, miss opportunities to glean value from these.
The stock market value of some of the world’s biggest companies – Apple, Microsoft and Uber – isn’t dependent on physical assets such as buildings, equipment or products. Instead, it is the intangible assets, such as patents, copyrights and trade secrets that drive value for these companies.
As an example, Apple shows $317bn of assets on its balance sheet in June 2020 and $72bn of shareholders’ funds. With a market cap of $2.25 trillion, the rest is in ‘hidden’ intangible assets.
This principle is, arguably, even more important for small and medium-sized enterprises. Innovative SMEs are likely to be built on ideas and intangible services, rather than more traditional, tangible assets. Whatever the company size, however, it is currently hard to show where real value lies; current accounting rules haven’t been updated since the 20th Century, so don’t reflect the rise in IP value.
When it comes to adding items to balance sheets, companies are restricted with the intangible assets that can be included.
Registering your IP
In order to be protected, IP such as patents and trademarks needs to be registered with the authorities. This is not the case for all IP though; copyright, for example, is automatically protected in most countries.
Registering IP is an effective way for a company to protect their name, brand and work. Registered IP is usually seen as more valuable, as well as being something that can be sold more readily, in the way that physical assets can be. Unregistered IP, such as copyright, can be much harder to identify ownership of, and therefore transfer of ownership can be difficult too.
To register IP in the UK, the relevant application form needs to be filed to the United Kingdom Intellectual Property Office (the UK IPO) The process usually takes 4-6 months.
Intellectual Property Rights (IPR) is a term that covers both registered and unregistered rights that are protected by law. These are significant in acquisitions and more and more businesses are realising the value of IPRs. A strategy to manage IP is incredibly important to maximise value and minimise risks of intangible assets.
With their protected assets, IP owners have certain exclusive rights, such as licensing IPRs for a fee, selling or assigning IPRs to generate revenue, or using IPRs as security, when applying for a loan for example.
A company could raise funds by selling IP that it no longer needs/has a use for to a company in a sector who would gain value from it.
Value of IP
It can be extremely challenging to value IPRs. Assigning a numeric value to something intangible isn’t straightforward but is important when valuing a business. This value will have an effect on the balance sheets, profit levels and taxes and, ultimately, will affect future revenue.
In some circumstances, IP can be sold, transferred or assigned offshore – however, due to the Organization for Economic Cooperation and Development’s (OECD) economic substance rules, it can be even more challenging for a business to locate IP offshore. SMEs from overseas can claim UK research and development tax relief; R&D is designed to promote investment in innovation within the private sector.
Certain IP, including trademarks, do not require a lot of substance to be held offshore. Most offshore centres align with the OECD recommended rules on economic substance; generally, thresholds for offshoring IP can be achieved with expert advice.
The real value of IP is going up, but what is displayed on the balance sheet is going down. This makes it much harder to understand the value of a business’ IP and intangible assets.
To combat tax ‘arbitrage’, profits are now taxed where they are generated. The tax world is now driven by OECD’s Base Erosion and Profit Shifting (BEPS) programme and IP-based BEPS tools are seen to be responsible for the largest BEPS flows globally.
The importance of IP and intangible assets is highlighted in high-profile Chapter 11 cases in the US, including J Crew and Revlon. In these instances, IP assets have been detached, relocated, and then used as collateral for new lending. Savvy lenders knew that the real value lies in the tangibles.
It is important to identify and value IP and intangible assets and ensure they are well protected before there’s an immediate need to do so. In business, things that can’t be measured can’t be managed.
How we can assist with IP
We’re a corporate law firm based in the City of London, authorised and regulated by the SRA. We put our clients first and undertake legal work diligently, responsively, and with the utmost integrity. Akbar Ali is the Managing Director and has significant IP experience from the numerous M&A deals he has worked on. These transaction amounts range from small sums of money, to billions.
Contact us to find out more.