When selling your business, it’s relatively easy to place a value on tangible assets like inventory and equipment. But what about intellectual property? If you’re selling your business, here’s how your intellectual property will be assessed.
Intellectual Property: Definition
What is intellectual property? Intellectual property (IP) refers to your ideas. It consists of the property of your mind, or things you have exclusive knowledge of, which can extend to artistic creations, product names, designs, or inventions.
For example, a software company typically includes a wealth of IP related to the design and implementation of software products, designs, and other core features. These non-physical assets can add considerable value when selling your business.
Types of Intellectual Property
Intellectual property poses a unique challenge since it’s generally harder to define compared to tangible assets. What is the nature of the IP? Who has the right to use the IP? What is the revenue potential of the IP?
Legally, IP can be classified as one of the following:
- Trade secret
These categories can make it easier to define the ownership and nature of the IP, and such defining can make the IP easier to buy and sell.
Methods for Valuing Intellectual Property
The World Intellectual Property Organization (WIPO) notes that recent years have seen a surge in patent applications, illustrating the importance placed on the world of ideas. Intellectual property can have a wide range of values, from zero all the way up to millions. Here’s how it is commonly valued.
The income method assigns a value to the IP based on revenue projections. The income method asks: How much can a buyer hope to earn with this IP? Often, historical data can be used to evaluate the future earnings potential of an idea or design.
The market method assigns a value to the IP based on the sale of similar assets in other transactions. This can often result in a more accurate, market-based valuation, though that also means that the value of the IP can fluctuate with the market.
The Benefits of a Business Broker
When you are selling a business, a business broker can ensure that you get a fair price. An experienced business broker will have the skills needed to determine the value of your IP. This way, you can be confident that you’ll be paid what your IP is truly worth.
Similarly, buyers will need a broker who can ensure that they are able to purchase all of the business assets, including the company’s IP. This also means navigating any legal challenges associated with patents or trademarks and giving the buyer clear title over the IP.
Get a Head Start on Selling Your Business
It’s hard to put a price tag on an idea. But Sunbelt Business Brokers of Naples can help you determine the value of your intellectual property and ensure that you receive the payment you deserve.