Friday 6 October 2017

New report commissioned by UKIPO on IP valuation market: Observations by the authors

In September 2017, the UK Intellectual Property Office (IPO) published a 148-page independent report, entitled “Hidden Value: A Study of the UK IP Valuation Market” that it had commissioned, and which was authored by Mr. Martin Brassell, Chief Executive, Inngot Limited and Dr. Jackie Maguire, Managing Director, Firm Advantage Limited. Mr. Brassell and Dr. Maguire have kindly provided IP Finance with a number of key observations based on the report. Interested IP Finance readers are invited to consult the report in its entirety (see below).

“Our study has provided an opportunity to investigate some important issues in the area of IP valuation. Why don’t more companies havean awareness of what their intangible assets are worth? What drives them to find out? What methods can they use to understand their asset value, and who helps them? Lastly, what can be done to encourage more firms to take IP value seriously?

We were unsurprised to discover that few, if any, managing directors wake up in a cold sweat at night worrying about how much their IP is worth. As previous research has indicated, many companies do not think of intangibles as being assets at all in the conventional sense. Even if they decide to capitalise the cost of developing or acquiring intangibles, their accounts sometimes appear to suggest that these assets are declining in value as they are being written down, even if their business contribution is in fact growing.

We found that the drivers for IP valuation are very specific and heavily transaction-oriented. We identified 22 distinct reasons for valuing IP, which fell into three categories. The largest number of drivers, accounting for the majority of IP valuation activity, relate to specific needs, such as transfer pricing, post-purchase accounting, preparation for M&A activity, estimating damages in litigation or (occasionally) insolvency. There is some IP valuation activity that is done as a positive response to specific opportunities, such as licensing, collaboration or raising investment. Finally, there is a small but growing number of occasions where there are new applications for IP that require value to be better understood – and this is where a specific opportunity for improved awareness appears to lie.

From the drivers that can be measured, it is unlikely that more than a few thousand IP valuations are currently being conducted annually. The valuation providers fall into two broad categories – large accounting firms and specialist ‘boutiques’ – with a very wide variation in costs, depending upon the complexity, purpose and origin of the valuations. Cost does not emerge as a barrier, as there is a range of services being provided addressing a range of needs. However, valuation providers confirmed a high degree of reliance on introductions or referrals from other professionals, which suggests that people only tend to value their IP when someone they respect tells them it is necessary to do so.

All of this points to an insufficient appreciation of the benefits of being able to measure IP value and thereby manage it better. More educational outreach, better access to information and meaningful testimonials could all help to address this situation over time; but the obvious question that remains is, if the benefits were more compelling, would not more businesses choose to value their IP? Realistically, in the busy world of the SMEs that form the overwhelming majority of UK firms, some pretty compelling incentives will be needed to make business leaders sit up and take notice when they have so many other competing priorities.

From the research that we conducted, it seems that these incentives might come from one of two directions. The first is strategic reporting in its various forms. It has long been apparent that financial statements miss out an important source of value creation in companies (for the reasons noted above); more attention is now being paid to filling these information gaps with insights on how a company is innovating and the assets it is producing as a consequence. Also, the most recent Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102) within generally accepted accounting principles (UK GAAP) is beginning to have some impact on accounting awareness of intangibles.

The second direction concerns access to finance, particularly debt, which remains the primary source of business funding. At present the regulations that are designed to ensure capital adequacy do not look kindly on intangible assets, because there is no accepted risk weighting for them. However, there are signs that lenders are beginning to take steps to obtain a better understanding of these assets and their business contribution. Of course, the main concern for a lender when dealing with any asset class is ultimately related to the value that it can recover if the asset needs to be sold to repay a loan. However, if the trend continues to find new ways forward to apply intangible asset value, IP assets could become more concretely associated with money in the minds of SMEs, which would certainly increase the appetite for IP valuation."

For the full results of the research and interviews with over 250 industry players see here.

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