How to Audit & Evaluate Intellectual Property
© Our Pal Asija, 2009
1.
Familiarize
yourself with the process of valuation and how evaluation consultants and
experts operate. Any search on the
Internet (e.g. Google) should include a word or phrase from each of the
following 3 categories.
(i)
IP, Patent,
Trademark, Copyright, goodwill, idea,
(ii)
Valuation,
evaluation, predictor, software, tool,
(iii)
Companies,
consultants, organizations, websites, books, videos, publications, articles
etc.
2.
Establish a
budget, objectives, time table and available resources for this due diligence
intensive task.
3.
Make an
inventory of entire portfolio of intellectual property. Divide it into various
types and put it on a spread sheet if more than a few are involved. Each piece
of IP should be on a separate row of the spread sheet. Column headings may
include:
(i)
Status of IP e.g.
issued pending licensed (exclusive, non-exclusive, limited defined exclusive
etc.)
(ii)
Venue of IP
(countries in which protected)
(iii)
Number of times
patent has been cited by the patent offices, general and trade press
(iv)
Associated and
estimated Goodwill
(v)
Income stream
generated even if loss as the licensee is often able to project profits by
economies of scale.
(vi)
Projected demand
(vii)
Level of
confidence
4.
Select and
prioritize one or more methods from the following 3 basic methods and many
variations thereof.
(i)
Cost Plus (including
actual cost + percentage of margin or in some exceptional new industry starting
cases a multiplier) for creation, protection and cashing. Typically costs
include (R & D + Prototype +
Patenting or
other protection + Marketing (including advertising campaigns and consumer
survey etc)
(ii)
Market value
(comparison with actual sales of comparable I.P in comparable circumstances,
types, venues etc.) This method is
similar to the method used by the Real Estate agents in evaluating real
property.
(iii)
Income Method
(Past, Present and Potential) This method becomes more attractive, certain and
less risky as the income stream is developed.
5.
You can reduce
your risk by using multiple methods and experts and average the results by
Delphi forecasting techniques.
6.
For a small
portfolio or for any reason you cannot afford consultants, the DIY (Do It
Yourself) approach is an option for which many software tools are available.
7.
Periodically
review and update the evaluation of portfolio as circumstances change (for
example enlarged or diminished portfolio, ownership changes, changed market
conditions, technological obsolescence, political climate etc) It is like solving a Jig Saw Puzzle where
the pieces of the puzzle are constantly changing shape.
RECOMMENDATIONS
- Keep an open mind and keep your
options open and revise the value of your portfolio periodically.
- Larger the portfolio lesser is the
risk and more are the available options. Likewise
further along the IP is, easier it is to cash.
- Greater the negotiating and staying
power, greater is the advantage in negotiating. Remember as a rule of
thumb the party that mentions the valuation numbers first is at a slight
disadvantage.
- Instead of cash transactions only, also
consider cross licensing, bartering and other innovative techniques
- Include ADR (Voluntary mediation
and/or compulsory arbitration) clauses especially if you are the smaller
entity.
-
Charge a fair price for your IP, consultations etc .Time is money
and nothing is FREE, but be fair to the other party. A deal is a good deal
only if it is a good deal for all parties otherwise it tantamount to
postponing troubles. Protect yourself but also them from mistakes.
- Familiarize yourself with the I P
valuation process and how evaluation consultants charge and operate by
visiting the following links:
http://www.patentboard.com/
http://www.journalofaccountancy.com/Issues/2004/Nov/20StepsForPricingAPatent.htm
http://www.appraisaleconomics.com/patent-valuation.htm
http://www.patentvaluepredictor.com/Home.asp
http://www.patenthawk.com/valuation.htm
http://ideanomics.com/category/patent-valuation/
http://www.investopedia.com/articles/fundamental-analysis/09/valuing-patent.asphttp://www.generalpatent.com/consulting/ip-valuation
CAVEATS:
1. Intellectual property laws are not designed to
protect ideas but merely expression of ideas by copyrights and embodiments of
ideas by patents. Limited protection can be had by trade secrets, contracts and
race to market approach to grab lion’s share of the market.
2. The value of all intellectual property is eventually
subjective, due diligence intensive, frustrating, imprecise, risky and depends
upon one’s ability to attract a ready willing and able party to negotiate with.
At best you can estimate a range in which the value may reside and just because
you have confidence in the range of value you have generated with considerable
due diligence does not mean you can convince others that the range is
realistic.
3. There are NO experts on evaluation of IP much less
ideas. The experts have been wrong in both directions. For example when experts
thought a certain IP is a “shoe-In” and cannot fail even if the owners tried
but it flopped miserably and conversely when the experts thought the IP was
useless and worthless it started a whole new industry.
4. There are many similarities and differences between
intellectual property and real property. Caution must be used and modification
is advisable when importing a real estate evaluation technique to IP
evaluation. Just as real property is defined by location and deed, IP is
defined by technology and scope of patent claims.
5. These are
merely guidelines and do not constitute legal advice for which you should
consult a practicing attorney. For further delineation of any of the steps or
caveats, the author would be pleased to provide with no obligation information
including contemporary hyperlinks to best consultants and websites.
Authors Our Pal Asija and Robert C. Johnson
Our Pal Asija, B.Sc., Grad IERE(Lond.), PGD, MBA,
PE, CDP, JD, ATM
CEO OUR PAL LLC, 7 Woonsocket Ave, Shelton, CT.
06484-5536 USA
Phone: 001-203-924-9538 FAX: 001-203-924-9956 www.OurPal.com
KingAsija@AOL.com or PalAsija@GMail.com
or PAL@OurPal.com