In recent years, intellectual capital, in all its forms, has acquired enormous importance in the business world. Proactive companies and inventors have known this for years, but the leverage that a patent, trademark, trade secret, or other piece of knowledge can provide has certainly increased. The number of patent applications and issued patents has skyrocketed in the last 15 years, trademark applications have also increased, and the rate at which intellectual property (IP) assets are asserted, licensed, and even sold is amazing.
Markets for trading/selling patents have been created and most of us are aware of the aggregator, non-practicing entities and “troll” business models that exist. But if you’re in the market to buy or sell IP assets, how do you know how much to ask if you’re a seller, or where to set your limit if you’re a buyer?
One of the best ways to sell is to put yourself in the buyer’s mindset. How will you make your decision to acquire an IP asset?
The IP asset disposal process takes place in three phases. The first is a market evaluation and intellectual capital assessment, the second is the identification of objectives and the negotiation of the terms of sale, and the last is the drafting of the sale agreement, the closing of the deal and the transfer of assets. .
1) Market evaluation and valuation
To provide a valuation of intellectual property assets, several methods can be used. We have taken some time to list and evaluate the benefits and drawbacks of each. Certain methods have been used that I like as “shortcuts” as there are times when a large number of patents or trademarks are being evaluated at once. I think the best method involves some good old fashioned hard work and analysis.
The “historical” method is a simplistic model that takes into account all direct costs incurred to date for technology development and IP protection and attempts to recover these costs plus an additional component for inflation compensation. While this method can improve historical consistency with patent sales price trends, the drawback for the inventor/developer is that there is no correlation between spending on patent or trademark protection or the potential for revenue generation. revenue from the final commercial product or service and the intellectual property in question. .
The “market” approach attempts to compare the selling price of IP assets with the scope and maturity of your own. Some have liked this for home buying where you search for “comps” in a neighborhood you’re looking to buy to help compare what is a reasonable price to pay for your own home. In our case, significant research is required to determine comparable states of technological maturity, as well as the scope of IP protection. The downside is that the prices paid for sales of IP assets are rarely made public, so benchmarking is not always easy. Going back to the home buying analogy, the house may look the same on the outside, but the condition of the interior and the foundation will make all the difference. The actual value of the assets must be equal to equal.
An analytical model using citation analysis and classification is a newer method that results from robust tools that were originally developed for the patent landscape. The idea is that the more citations your patent has, the more valuable it should be, as it is likely to be considered seminal work in your industry. The problem with this is that there are many reasons why a patent is cited as prior art, and unless every prior citation is scrutinized, the true value of the patent in question cannot be determined. I think analytics tools have a great place in the IP landscaping space, but they end up being a poor method of determining a proper valuation. This approach is also irrelevant for trademarks, since it is not possible to use citations in the evaluation of a brand and accompanying brands/logos.
Therefore, I would propose the method referred to as the “income” approach. This involves quantifying a cash flow forecast based on future revenue streams from the commercial use of the IP asset. This approach will require the need for market research and analysis on projected sales and market share, volume production price, and standard profit margin, all of which must be placed in a cost model.
The reason this method works better is that savvy potential buyers and corporations will likely build a similar model and look at the net present value (NPV) of trading the IP. One component of your purchase analysis is to investigate whether the acquisition cost of the intellectual property assets causes your NPV calculation to be zero or negative. If that’s the case, it’s unlikely they’ll accept the purchase.
But, just because you can calculate a positive NPV doesn’t mean you’re free of problems. The best approach is to select an appraisal price cap that does not force the NPV calculation to generate an internal rate of return (IRR) that is below the buyer’s threshold for overall internal project approval. For most companies, this IRR is usually on the order of 20 to 25%. It is highly recommended to start with a valuation price that results in an IRR of 12-15% and work your way down the price scale from there.
While this method requires adequate market knowledge and cost forecasting ability, I believe that for most industries there is enough market research out there for a very informed guess at the worst case.
2) Identification of objectives and negotiation of terms of sale
This phase should be self-explanatory, but it does involve identifying interested buyers and trying to determine their valuation methods and IRR threshold, so that a price that is fair to both parties can be established.
Potential buyers can be those who you can infer are patent or trademark infringement or even a company looking to get into the line of business for the type of IP assets you own. Doing a bit of homework can usually produce a reasonably complete list, but looking at the markets for the sale of IP assets is another approach. Keep in mind that some of these charge fees for listing and may also charge a fee for the sale.
The involvement of a representative from a law firm with experience in sales of IP assets may be required at this stage, but will definitely be required for the drafting and review of the sales contract, which follows.
3) Drafting of the Contract for the Sale and Transfer of Assets
This step should also be self-explanatory. Once a buyer has been identified, the negotiation of the terms will take place. License return (if desired), title transfer, and payment terms should all be part of the discussion.
There are sample agreements for these types of transactions, but it is strongly recommended that a legal expert review and approve the draft and final language of such an agreement. Upon execution of the agreement, the transfer of assets will take place in a manner that has likely been negotiated and should be described in the agreement.
Considering working with a law firm or broker?
Most sellers of IP assets are inclined to engage a law firm or broker who specializes in these types of transactions to act on their behalf. Understand that a broker/market maker is likely to ask for 20-30% of the proceeds from the sale of assets, but law firms may ask for even more, 35-50%. The involvement of a legal professional is not only a good idea, but may be necessary, as someone with a very good understanding of contracts and property transfers is essential to this effort. However, there are some caveats to this type of arrangement:
A) If you are working with a broker or attorney, it would be highly recommended that the partner selected for this type of effort be willing to accept deferred payment for services rendered until the sale of the asset is complete. However, some of them ask for an advance payment and some may ask for compensation even if the sale of assets is not completed.
B) In addition, it is recommended that for the involvement of a legal professional, you make payment to the attorney/firm on a pre-negotiated flat rate or on an hourly rate only for the specific services rendered in connection with the drafting of the sales contract. and review. Otherwise, the law firm may be inclined to request a large percentage of the asset sale as payment for services rendered, and I think they would be asking for more of the value they would add to this effort given their limited involvement. .
If you want a lawyer to handle the negotiation for you, then it might be okay to settle for their terms, but you don’t have to give up half of your winnings if you don’t want to.
Don’t have a trademark or patent yet?
Whether you are an individual entrepreneur/inventor or a large corporation, you will find it worthwhile to have trademarks and issued patents, or at least file applications. Ideas are intangible assets that cannot be easily valued. Patents and trademarks are a form of tangible asset that has some capital cost associated with processing and the commercial value that IP creates. The more you have to offer a buyer in tangible IP assets, the more your valuation will increase. Simple as that.
Also, some advice for those people who “have a great idea that they want to sell to a company”. This is a great dream to have, but the more homework and effort you put into presenting a comprehensive analysis to a potential buyer, the more likely you are to see success. If you’ve tried to approach companies before and been turned down, think about your sales method.
You can capitalize on your great ideas if you have the right tools at your disposal. Knowing what you’re getting into will prepare you vs. being surprised and feeling taken advantage of later.
