"Hidden Value: a Study of the UK IP Valuation Market"

Jane Lambert

The appointment of Metis Partners to market the intellectual property of W. Barratt & Co. Ltd. which I mentioned in IP Yorkshire yesterday (see Bradford Footwear Distributor's Intellectual Property Sale 29 Sept 2017 IP Yorks) occurred a few days after the publication of Hidden Value: A study of the UK IP Valuation Market by the Intelectual Property Office.  

This was a report by Martin Brassell and Jackie Maguire which was commissioned by the IPO to understand why companies do not consider the hidden financial value of their intangible assets and particularly intellectual property on a more routine basis. The research does not appear to answer that question directly but rather a number of preliminary questions:-

• Who are the main suppliers of IP valuation services and how they operate?
• Why businesses seek IP valuation services?
• Whether there are any barriers to the development of a market for valuation services? and
• If so, how to overcome those barriers?

The authors found that there were about 40 firms and companies that offer IP valuation services. They range from big international accountancy practices to specialist consultancies such as Ingot which Mr Btassell had helped to found, Coller IP which was Ms Maguire's old firn and Metis Partners which had been instructed to market Barratt's and Brantano's intellectual property (see Bradford Footwear Distributor's Intellectual Property Sale (supra) and Brantano IP and Insolvency 23 June 2017 NIPC East Midlands).  Their instructions may come directly from the businesses that are the subject of the valuation or from intermediaries such as lawyers or insolvency practitioners.  The authors estimated that there were about 5,000 valuations a year in the UK generating at least £50 million in fees though they thought that that figure was likely to be very much higher.

They identified "22 reasonably distinct purposes for IP valuation" ranging from litigation and insolvency to seeking equity investment and negotiating licences. They also found new reasons for seeking IP valuations like IP insurance and collateral for debt funding.  Businesses were more likely to seek valuations because they had to do so rather than not but many of those that had sought such valuations for positive reasons such as raising funding appreciated their value.

The authors found that "cost; lack of awareness and understanding of the benefits and the process; lack of understanding of where and how to find a valuer; lack of information to make an informed choice; limited ability to use IP to raise finance; and other more pressing business priorities" were barriers to the development of a market for valuation services. Cost was a factor because managers did not understand how the valuation of intellectual property could add value to a company.  Investors were more likely to understand the value of IP valuation but it was not their highest priority. Many startups and other small businesses simply had better uses for their money. Banks are reluctant to lend against IP because they doubt that IP rights of themselves can have any value in a liquidation.

A number of steps were recommended to encourage use of valuation services:

• publication of a number of case studies to show the benefits of valuation;
• including a directory of IP valuers and their specialisms in the IPO's finance toolkit;
• a tailored outreach programme of education and incentives by the IPO targeted towards businesses and intermediaries including direct discussions with lenders and investors;
• further research to demonstrate the link between IP valuations and strategy;
• opening discussions with the accountancy professions on how best to include IP valuations in annual accounts and other financial statements.

The report was accompanied by an appendix on UK valuation methodology that I found even more useful and interesting than the report itself. These were the result of a series of interviews with the partners or directors of some 15 service providers and 8 intermediaries and telephone conversations with a number of others in the industry who declined to be interviewed formally but nevertheless provided information.

The study has prompted my own thoughts on IP valuation, whether it is a useful exercise and, if it is, in what circumstances.  A difficulty, in my view,  arising from confusing intellectual property with intellectual assets. "Intellectual property assets" is a confusing term that is best avoided.  Intellectual assets are the subject of intellectual property protection such as inventions, films or novels and intellectual property is the legal protection such as the patent or copyright. It is the asset rather than the legal protection of the asset that generates income for the asset;s owner and gives his or her business a competitive advantage. Intellectual property merely limits access to such asset much in the way that the law of trespass restricts access to factories and farmland. It is not the law of trespass that gives a building or field its value but the use that is made of it. To a large extent, that depends on ownership. If a business that owns the factory is a going concern the factory has value. If not, it just a derelict or wasteland.

Much the same applies to assets protected by intellectual property.  Successful businesses seek legal protection for their inventions, brands and designs to protect their investment in developing those assets. While such asset contributes revenue to a business it has a value. When it ceases to do that (which may have nothing to do with the inherent utility of the asset) it diminishes in value like a disused factory. Auditors have been valuing revenue generating assets such as machines and goodwill for years. One way at looking at intellectual property is a factor that delays the depreciation of the value of an asset.

Another difficulty with IP valuation is that not all IP rights are of equal value. Take a patent for a new invention, for example.  A specification with narrow claims can be easily circumvented. One with over-wide claims may prove to be invalid.  A valuer cannot form a view of the value of a patent without reading it very carefully in the context of the prior art.  That is the job of patent counsel and patent attorneys and they charge for their services.

That is not to say that IP valuation does not have its uses. Far from it.  But I can understand the reluctance of business owners and managers to seek valuations and banks' scepticism of intellectual property valuations.  I think valuation techniques have to improve before the market grows much more. Should anyone wish to discuss this article or IP valuation generally he or she should call me during office hours on 020 7404 5252 or send me a message through my contact form.