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Valuing Intellectual Property

The late 1990s saw the rise of corporate valuations arising from ownership of various forms of intellectual property, rather than the traditional value arising from production and sale of goods or services.

Prepare a management brief for Acme's upper management group on the current state of valuing intellectual property.

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Intellectual capital ("IPR") is recognised as the most important asset of many of the world's largest and most powerful companies; it is the foundation for the market dominance and continuing profitability of leading corporations. It is often the key objective in mergers and acquisitions and knowledgeable companies are increasingly using licensing routes to transfer these assets to low tax jurisdictions.

For the valuer this is not usually a problem when these rights and liabilities take an accepted form, such as trademarks, patents or copyright, which are well enough known. This is not the case with intangibles such as know-how and proprietary technology, which can include the talents, skill and knowledge of the workforce, training systems and methods, designs and technical processes, customer lists, distribution networks etc. Generally risk affects valuation analysis, corporate valuation must reflect risk, and most importantly risk should reflect value.

One of the key factors affecting a company's success or failure is the degree to which it effectively exploits intellectual capital and values risk. Management obviously need to know the value of the IPR and risks for the same reason that they need to know the underlying value of their tangible assets; because business managers need to know, or should know, the value of all assets and liabilities under their stewardship and control, to make sure that values are maintained. Exploitation can take many forms, ranging from outright sale of an asset, or a joint venture or licensing agreement. Inevitably exploitation increases the risk assessment.

Valuation procedure is, essentially, a bringing together of the economic concept of value and the legal concept of property. The cardinal rule of commercial valuation is that the value of something cannot be stated in the abstract; all that can be stated is the value of a thing in a particular place, at a particular time, in particular circumstances. We adhere to this and the questions 'valuable to whom?' and 'important for what purpose?' must always be asked before a valuation can be carried out. This rule is particularly significant as far as the valuation of intellectual property rights is concerned. More often than not in commercial negotiations, there will only be one or two interested parties, and the value to each of ...

Solution Summary

The solution gives 1431 words on how important intellectual capital is as an asset to a company and, as a result, how vital it is that the company values and exploits it. It looks at concepts of owner, market, tax and fair value as well as market- and cost-based valuation methods and also how shareholders, banks and industrial tycoons view intellectual property. 6 references included.