There is an inherent flow to managing an intellectual property valuation engagement. It starts with the sales process (which can vary from organization to organization) and ends with the delivery and support of any resulting valuation report. In BVR’s publication, Guide to Intellectual Property Valuation, 2nd edition, author Michael Pellegrino outlines the typical process and steps that a valuation professional may want to follow when performing an intellectual property (IP) valuation.
- Project Preparation: The purpose of project preparation in the IP valuation process is to prepare the team that will perform the valuation engagement by outlining project expectations. A project kickoff meeting should be the first task in project preparation; this meeting pulls together all members of the team that will work on the engagement to discuss it in detail. The project kickoff meeting is an important part of the valuation engagement because it may help set the tone and direction for the engagement.
- Initial Due Diligence: Initial due diligence is the part of the engagement process where the valuation analyst gains a reasonable understanding of the intellectual property to value. Performing initial due diligence is a customer-facing activity. The valuation analyst meets with the customer to review the IP, seeking to gain a reasonable understanding of the IP to review, status of IP rights, IP development costs, target markets for the IP, competitive landscape for the IP, and forecast economic expectations for the IP.
- IP Analysis: IP analysis is the next step in the IP valuation engagement process. During this step, the valuation analyst must generate a complete, comprehensive understanding of the intellectual property. This includes understanding the use of the IP in the market currently, the chain of ownership for the IP, any claims against the IP, the administrative status of the IP (e.g., are patent maintenance fees current?), the IP owner’s litigation record and resources, and the current development status of the IP.
- Market Analysis: Once an IP valuation analyst understands the intellectual property, he or she then needs to understand where the IP fits within the broader market. This is the function of the market analysis piece of the IP valuation engagement. Importantly, a valuation analyst cannot begin market analysis until having a complete understanding of the IP under review. For example, one purpose of the market analysis is to evaluate a given IP asset against possible competing alternatives in the market. The valuation analyst would not be able to perform this analysis competently without first understanding the IP very well.
- Valuation Modeling: Once a valuation analyst understands the legal status and the market for the intellectual property (i.e., the qualitative measures), he or she needs to pull all of these together into a valuation model (i.e., the quantitative measures). This is the function of the valuation modeling in an IP valuation engagement. A valuation analyst cannot begin valuation modeling until having a complete understanding of the IP under review and the market where the IP deployment occurs. For example, one purpose of valuation modeling is to quantify the revenue potential for a given IP asset against possible competing alternatives in the market. The valuation analyst would not be able to perform this analysis competently without first understanding the possible demand and associated pricing.
- Valuation Reporting: Valuation report writing is the last major element of the process in an IP valuation engagement. The valuation analyst pulls all of the due diligence, IP analysis, market research, and valuation modeling into a comprehensive, cohesive work product.
- Project Support: Project support varies by engagement. Some customers may never call again because the valuation report satisfied a particular purpose and there is no longer a need for any project support (e.g., an acquisition where the seller hires the valuation analyst to provide a value of the IP to ensure the seller is receiving a fair deal). Other customers may require ongoing support, including availability of the valuation analyst to answer questions, testify in any legal proceedings, and so forth. While it is difficult to know the depth and breadth of such project support initially, valuation analysts commonly address post-project support hourly or as part of a support level included in the original engagement description.
Conclusion: For more on intellectual property valuation including detailed chapters on valuation approaches, general due diligence, discount rate development, and more, check out BVR’s publication, Guide to Intellectual Property Valuation, 2nd edition, written by IP expert Michael Pellegrino. BVR also offers a resource center with additional IP-related resources such as news and research, royalty rate databases, and several other publications.