Intellectual property (IP) can potentially hold a lot of value for a business, if it’s valued properly. For small and medium sized businesses, especially those in the creative sector, where businesses have deep benches of IP assets and rely upon them heavily for revenue. In those sectors, the ability to value IP in an effective and truthful fashion is an asset in its own right.

But it can be difficult to attract funding for largely IP-related businesses without taking early measures to protect and value it properly.

Even amid acute business distress, IP assets can retain enough value to help beleaguered owners salve their wounds. On 30 March, after years of losses, shoe company Allbirds announced that it had sold off its IP assets, encompassing its trademarks and product innovations, to brand management and licensing specialists American Exchange for $39m. After a few tough trading years, the IP had retained its value the best.

Why IP valuation matters

“If you know the value of your IP, it allows for a much better quality of conversation around how those assets are managed, protected and commercially exploited,” says Phil Robinson ACA, Valuation Director at specialist IP advisers Valuation Consulting.

He notes: “If your IP is not fully quantified, then when your business is thinking about how much it should invest in, say, brand protection, some senior figures may view that measure as a cost centre. But if you know – and can prove – that you’re safeguarding IP of significant worth to the business, it puts that spending into context.

“Understanding the value of your IP enables you to be clear on the risks of not protecting it, and the opportunities and benefits you could reap by ensuring it is properly commercialised.”

Manage your trademarks

Robinson points out that in creative-sector SMEs, particularly in their early stages, the founders and their creative output are the primary drivers of the business, while operational elements are often lagging.

From an IP perspective, those elements could include some fairly basic measures. “For example,” he says, “are you maintaining a trademark register showing which brands you’re actively managing and protecting? Are you monitoring for threats such as trademark infringement, or parasitic packaging that mimics your brand identity?”

As an operational task, Robinson stresses, IP valuation is just as important as IP protection – especially when you are seeking investment. Indeed, valuation should provide investors and lenders with data that is every bit as robust and reliable as historical accounts, management accounts or bank reconciliations.

Map out the life cycle of your IP

For Robinson, the essence of IP valuation is to build a narrative that charts the entire lifecycle of your IP assets from the ground up.

“In the case of patented products,” he says, “that begins with what you spent on developing the IP in the first place, through exercises such as research, development and prototyping, where you found out what worked and what didn’t.”

Next is income: what revenue has the IP generated so far, and what do you expect it to generate in the future? “As your business matures,” Robinson says, “you may find that your revenue stream gradually switches from one branch of IP to another.”

Taking footwear as example, there may be some innovative materials, composites or manufacturing techniques that initially set a product apart and drove a business forwards. “But competitors always catch up with their own innovations,” says Robinson. “So perhaps most of the company’s growth momentum now comes from the strong brand built off the back of its products.”

Strike a balance between the quantitative and qualitative

Crucially, Robinson explains, you must strike a balance between quantitative and qualitative information. After all, these are intangible assets and their stories are not always purely financial – especially when it comes to how brands or products are perceived in the public eye.

“It’s a bit of a crude analogy, but this is rather like the TV show Dragons’ Den,” he says. “Some contestants have a brilliant concept, but don’t have hard numbers to back it up. Others have all the hard numbers in place, but the concept may be shakier than they think it is. It’s all about ensuring that those halves of the story complement and support each other.”

Explaining IP value to investors

What sort of format should businesses use to present IP valuation information to make a compelling case to investors?

“In a classic mergers and acquisitions due diligence process, you’d typically have an investment bank create a huge data book with everything in it – historical material, forecasts and so on,” Robinson says.

“Now, for most SMEs, that would be overkill. But it’s about compiling a single source of truth that everyone in the business stands behind. In creative small businesses, that should definitely include your IP registers.”

This would enable a prospective financier to understand that the company is IP-led, what the IP is, how it’s protected and how it links to the financials, he explains, demonstrating how the IP can support strategies such as licensing and international expansion.

On the qualitative side, Robinson notes, the data book may also contain material on how the IP ties into the company’s mission statement, ethos or social values – and could even include testimonies from consumers on what the relevant products or brands mean to them.

In tandem, notes on threats to your IP value could engage your investors’ support with tackling them. At this time, one emerging threat is theft by artificial intelligence (AI) entities, which can readily copy or imitate key asset types. Valuation Consulting has already worked alongside content owners who are trying to bring claims against AI companies for copyright infringement.

When it comes to quantifying your losses, Robinson notes: “There’s a black-box element, here, in that you can’t always pinpoint exactly how your IP has been used, even if you know it has been. However, applying traditional licensing metrics to this new area doesn’t work. So, this is definitely something to keep an eye on.”