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Monday, 10 August 2015

Disposing of IP Wisely: How to Extract Value


When I met my friend recently, I was surprised to hear him mention casually that he had closed down his company and that he was now working for someone else. I was surprised, because he had spent years trying to build up his start up. He had spent time trying to build the brand, the suppliers, and brand loyalty. Surely, he realised that his company, floundering though it had been, was the owner of a valuable brand? Did he manage to sell off the company and the IP (intellectual property) of the company, and get some money back?

"No, I wasn't thinking about that," he said. "I was just too tired. And the new job looked good. I just wanted to start work in the new place."

Incredulous, I looked at him. "And you couldn't have considered selling your company to me for a cheap price...?"

"No, sorry." He chuckled. He was in a good place now.

Then I gave him a short piece of my mind. Didn't he know, that his company had goodwill among customers? That, among a certain segment of society, his company had become, in their minds at least, a credible company? Didn't he know that brands could be grown to become very, very valuable assets?

No, he shook his head. He did not know.

Alas.

So, dear reader, in case you feel like shutting down your company and moving on to something else, consider my thoughts. Your company can be valued, and a price placed on every asset of the company. Stocks are worth money. Assets, like buildings and furniture, are worth money. Goodwill -- intangible stakeholder loyalty -- is also worth money. And then comes our portion of interest: intellectual property. Does the company own any trademarks? Special designs? Patents? These, too, are worth money.

Naturally, an accountant is usually called to put a value to the company's assets. In most things, an accountant is the right guy for the job. Straight line depreciation shows how much assets have lost value. Market prices show how much fixed assets are worth. Monies in the bank account need no mention, as the monies already describe their own worth. But goodwill is elusive. Aswath Damodaran said that goodwill is what people want to pay, or are willing pay, for shares in a company ---  but cannot justify it with tangible assets. Thus, goodwill. The intangible assets that a company gains throughout its lifetime, through interactions with stakeholders -- principally customers, but also suppliers, and employees, and community.

But when intellectual property is at stake, who is best called to value it? The Malaysian Intellectual Property Corporation, otherwise known as MyIPO, is pushing the industry along to give birth to IP valuers. But the going is slow, with seminars here and a talk or two there.

A few weeks ago, I had the opportunity to go to an IP Valuation Masterclass organized by MyIPO at Doubletree Hilton Hotel. My professor, a valuer of IP himself, had graciously invited me. During the class, I was fortunate to be able to follow some of the calculations that the expert (an Australian, I remember) was working out on the screen. The whole thing had been a walkthrough of various valuation methods, and then came the number crunching. If I were to summarize my feelings about the masterclass: The lawyers in the room struggled to make sense of the number crunching. They weren't cut out to be Excel Ninjas. But the good thing about lawyers is that, give them enough time, they'll sharpen up enough to surprise you with their newfound fluency in the subject.

Generally, there are three approaches to valuing IP. The first among these is the cost method: What would someone need to spend, in order to recreate the IP? The second is the income method: What is the income generated by the IP? The third is the market method: What is the market willing to pay for a comparable IP? I won't pretend that I know much about the art of valuation. I am still learning about it, and I've started on the journey towards becoming a valuer of IP. (That is, I've bought a couple of Wiley books on patent valuation and brand valuation....) In the meantime, if anyone is looking for someone to help place a price tag on their IP -- copyright, trademarks, patents, designs, et al -- you can contact me. I'll work with my professor to help you out, and I know that my professor is a real pro at valuation.

Value your IP before you dispose of your company, and you'll have a better deal. Even if you were only disposing your IP to raise funds for your company, it still makes sense.
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