Where value resides in a business depends on the buyer. It has become increasingly common for those seeking to acquire a company to place greater importance in the intellectual property (IP) of the asset they seek to acquire.
That is ostensibly good news for the seller, but it comes with problems, for both sides. Putting a value on something that is intangible can prove challenging. If you’re buying a brewery, you can see the machinery and the beer it makes but how do you price the brainpower behind making it all work well and the creative effort that led to the brewery being worth buying?
Making that IP recognisable is the first step towards putting a value on it. The good news is that IP doesn’t need to be valued in isolation. Much as light movement is used to identify distant exoplanets, the impact of IP can be derived in other aspects of an asset’s performance.
“Understanding the key business drivers and associated future cash flows is the essential first step. Intangible assets such as brands, software, customer relationships and proprietary know-how increasingly drive deal value,” says Paul Murray, head of valuations at Grant Thornton.
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“Buyers need to distinguish between what is owned and what is licensed, assess how transferable those rights are, and understand the durability of economic benefits.”
There is no single right way to value IP. Instead, buyers need to understand the type of asset they are buying and work out where the IP impacts the performance and overall success of that asset. This, naturally, requires a great deal of research.
“Robust valuation depends on aligning financial analysis with due diligence, ensuring that assumptions on growth, margins, attrition and obsolescence reflect the specific risk profile of each asset,” says Murray.
Due diligence really comes to the fore when working through how IP is managed. Better documented IP will automatically be easier to value as the seller will have made it clearer how it impacts asset performance. Those who haven’t documented it well present challenges.
“The most common issues stem from a gap between how value is created and how IP is documented,” says Murray.
“This often includes unclear ownership of internally developed technology, unregistered brands, incomplete trademark coverage, or core IP that has not been properly protected.”
Poor foundations can have an enormously detrimental impact on any deal. Any weaknesses in IP, be it on actual relevance or how clearly it is documented, can alter the value of a deal considerably.
“These weaknesses typically lead to valuation discounts, elevated risk for the buyer and a need for additional legal protections or more conservative deal structures,” says Murray.
“In some cases, they can delay or jeopardise the transaction entirely.”
Clarity of IP is vital for a deal to succeed with a fair value. Our hypothetical brewery can put a valuation on physical stock, machinery and infrastructure with ease, but the extra effort required in valuing and clarifying IP should not be a deterrent from putting the work in to ensure it is accurately accounted for.
“Intangible assets should be treated as a dedicated due diligence workstream. Buyers should verify ownership, freedom to operate, the strength of registrations and contracts, and any dependence on key individuals or third-party platforms,” says Murray. “Deal structuring should ensure that all necessary rights transfer cleanly at completion.”
Putting a number on the value of IP is only part of the challenge. The test of that value comes after the deal is complete. How do you retain that value, particularly when it comes to the market knowledge of employees?
“Key risks include the loss of critical employees, disruption to licensing or customer arrangements, and failures to integrate systems, processes or governance,” says Murray.
“Effective mitigation involves identifying these risks early, building protections into deal terms and integration plans, retaining key talent, formalising knowledge transfer and maintaining strong, ongoing oversight of the IP portfolio.”
This is a process for bringing tangibility to the intangible and visibility to the invisible. Those involved in a deal, on both sides, who put the work in will be rewarded with clarity and a better outcome for all concerned.
