Putting a Price on Technology
Valuing technology-related intellectual property (IP) can be an enormous challenge for lawyers and valuation experts. It considers the degree of legal protection associated with technology IP as well as the economic benefits a company is expected to derive from that protection.
Technology IP may include several types of assets, including patents, copyrights and trade secrets. The need to value these assets can arise in a variety of contexts, including litigation, financial reporting, mergers and acquisitions, strategic planning, and tax planning.
Valuing Economic Benefit
One of the most challenging tasks is identifying the revenues or other economic benefits attributable to technology IP. If the company derives its revenues from licensing, it may be relatively straightforward. But many companies use technology to develop numerous products or streamline processes, which creates multiple sources of revenue and cost-savings.
Typically, valuation experts analyze the various economic benefits associated with a technology IP asset separately. Each benefit presents different risks, which should be reflected in the discount rate used to convert projected income streams into a present value. For example, a patent may be associated with developed technology, in-process research and development (IPR&D), and future technology.
Developed technology, such as a current product, can be traced to relatively predictable revenue streams. The economic benefits of IPR&D are riskier, which generally is reflected in a higher discount rate, while future technology presents the greatest risk. Another risk is whether the legal protections will hold up to challenge. Could a court find a patent to be invalid? Are proper steps in place to protect a trade secret from prying eyes?
Current accounting standards provide detailed rules for valuing and reporting technology IP and other intangible assets acquired in a business combination. For example, developed technology is recorded at fair value, while acquired IPR&D projects are capitalized at fair value and then tested annually for impairment until they’re completed or abandoned. The value of future technology is captured as part of goodwill.
Another challenge in valuing technology IP is determining its economic life. This requires consideration of product development cycles, obsolescence, innovation in the industry and the duration of available legal protections.
Work with Experts
Technology-related intellectual property is a significant component of value for many companies today. Lawyers should be prepared to work closely with valuation experts to put a price tag on these assets.