Two calculations are crucial when valuing IP for an investor:
Rate of return: An investor puts up money and expects a return. Because some investments fail, and others just plod on, investors must a get high enough return on the successful projects to compensate for the losers.
Holding period: The longer the holding period, the less project risk for an investor, as this allows the investment time to make up for sluggishness or losses. Of course, the longer holding period lowers the implied rate of return and discount rate.
Matt Dunning in Business Insurance outlines three crucial elements that are missing in most M&A checklists:
- Buying patent rights does not mean you are buying the ability to exploit that patent; rather, it means you can prevent others from exploiting it. An invention can be covered by multiple patents.
- Buyers and sellers tend to limit their accounting for the intangible property to be acquired, often neglecting to take into account significant value found in customer lists, marketing plans, copyrighted materials, etc.
- In-licensing activities of the acquired firm may have resulted in licenses that contain exclusions on the right of use in the event of a merger or acquisition.