Purpose for valuation of intangible property illustrates the need for royalty rate research


Craig Johnson at The New York Law Journal lists three legal reasons why intellectual property may require a separate valuation, and at the same time indirectly explains the need for royalty rate research in each setting.

For financial reporting purposes: The values of home-grown intangible assets are not recorded in a company’s financial reports in the normal course of business. If a company is acquired, accountants must allocate purchase price amongst the acquired company's assets, requiring a valuation of the intangible assets for recording on the buyer’s balance sheet. Then, the intangible assets also may need to be valued after the acquisition, when a company must test intangible assets for impairment. Many times the value of IP in an acquired company can best be solved for using the relief-from-royalty approach: if the firm had to license a patent to perform the function being performed by an acquired patent, what would it have to pay?

For tax calculation and tax planning purposes: Income producing intangible assets are sometimes transferred to a separate company, in tax-favorable circumstances, and need to be valued for tax purposes. “For example, a company may separate the income from its centrally developed IP by retaining it at the corporate level and licensing it out to its foreign operating subsidiaries.” Proving the value of those licenses can be tricky. Revenue authorities insist the agreements have to be arm’s length, without involvement of related parties. An extensive database of comparable licenses can be an analyst’s best friend in those cases.

For litigation purposes: Intangible assets are sometimes separately valued for litigation and damages purposes in situations including “infringement, breach of contract, fraud, and expropriation.” Dissolution of a business, through a partner leaving, divorce or bankruptcy can create a need for intangible property valuation. IP Value Wire once blogged about Tavern on the Green, a famous New York City restaurant that couldn’t survive an earlier economic downturn. Auction sales of tangible assets yielded $3.5M, and over 1,000 bidders (collectors) participated.  However, what was left was the name, which analysts at one time valued at $20M!

A search of the ktMINE database offered by BVR reveals over 100 IP licenses of marketing intangibles in the restaurant industry.

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