As the WORLD INTELLECTUAL PROPERTY ORGANISATION WIPO puts it: “A crucial point about legal protection of intellectual property is that it turns intangible assets into exclusive property rights, albeit for a limited period of time.” It makes intangible assets a bit more tangible, and assets tradable. You may have created new ideas. But you need to protect them. Protected by IP rights they acquire value. Your ideas then cannot be commercialised without your authorisation. You can include your IP rights on the balance sheet. When? This is something you need expert advice upon – more on this below. You may complete an IP and technology audit. Indeed, that could show your IP worth more than your “tangible” assets! At Dorset Business Angels, our Chairman Don McQueen, Vice Chairman Frank Guinn and expert colleagues in IP have been frustrated seeing young inventors failing to protect their ideas and inventions; they and other businesses frequently lack commercialisation capabilities. By this I mean, the process to introduce new product or service to the general market; understanding IP is part of this. We offer mentoring to try and redress this. And partner with experts to pass on expertise. The Intellectual Property IP contribution to company value can be vital. Of course, some directors maximise IP opportunities: they create, protect and utilise IP. Others are wasteful. You need first class legal and financial IP advice on IP. And a great management team to realise IP and valuation opportunities.
IP on the Balance Sheet
Here is a concise and excellent explanation from Metis Partners, who are a multi-disciplinary IP firm with a proven track record in the assessment, exploitation, monetisation, valuation and sale of intellectual property assets (“IP assets”). “It is often difficult for companies to get recognition for investment in IP assets on their balance sheets, despite the fact that these assets often make up in excess of 80% of the company valuation. Although certain types of IP assets can be capitalised at cost, the accounting rules don’t make this easy – typically, the most valuable IP assets such as the company brand cannot be capitalised on the balance sheet.” more on this here. Metis are also behind the excellent Intellectual Property League Table – you can read the IP 100 top hundred league table and case studies special report.
If you have Intellectual Property IP it will add value to your business. So on this topic, how do you value a business? For existing businesses there are a number of ways, typically:
Earnings Multiples – a formula for how to value a business based on a multiple of net profits (the Price/Earnings (P/E) Ratio representing the value of the business divided by its post tax profits.). Accountants can usually provide the multiple for your sector.
Equity strategy that will increase the multiplier. Building business assets. But while multiples of earnings can be used as a business valuation method, there is no standard P/E ratio figure that can be used to value every business. Certain sectors, such as IT and technology have higher ratios than retail for example. If the business is reliant on a few products or has one or two key people for example, this creates a higher risk of buying the business which will also mean a lower P/E ratio.
The less reliant on an owner the business, the higher the business valuation.
Other drivers of business valuation include:
- new product range capability
- Price/margin increase opportunity (for more profits)
- Expansion of distribution channels
- Expansion into new markets
- In fact a marketing mix review, assessing opportunities to leverage the capabilities of the company, this will affect the value
Silicon Valley valuation model – Nick Hixson Director of Hixsons shared this with us, a more modern, and more helpful approach perhaps?
Its all about the team – so all employees have shares.
Valuation – 2 bases aggregated: Asset value – what they have created in real assts plus any IP, plus future value, calculated in simplest terms as probability of future earnings. So, if the future value is £100m, and there’s a 1% chance of it happening, value now is £1m.
Critically, release of money isn’t all in one go, nor is it predicated on future milestones. Usually, you get more once sales pass £x, profits achieve £y etc. SV valuations and release of funds are based on learnings. Learnings occur when they get better info on market, customers, whatever is critical and adapt pans fast such that probability improves. Thus is how valuations move. If probability of success becomes 2%, suddenly valuation goes from £1m to £2m.
Our investors at DBA are looking for a good deal. Value. Chairman Don McQueen in a recent interview with Dorset Magazine gave his “Top Tips for a Successful Pitch”. Don is highly experienced with matters IP. Interestingly, whilst he values greatly IP and always asks about it of our presenters. He did not list it as one of the key tips. IP is valuable, don’t get me wrong, and will greatly affect company value – crucial to an investor. “Pre Money Valuation” is the value of the company before business angel investors put money into the company. It’s a matter of opinion. Typically investors wanting a lower price (understandably) and owner/entrepreneurs seeking the highest price. But there appears to be noticeably higher submitted Pre-Money-Values these days that we receive. And perhaps accounts for a good number of rejections! In the end, what is the key thing the investors are looking for? It goes back to what Don McQueen says in his Top Tips, it is ultimately the quality of the management team, that makes the difference. That is the reality. That is the view of investors. The Intellectual Property IP contribution to company value can be vital. Of course, some directors maximise IP opportunities: they create, protect and utilise IP. Others are wasteful. You need first class legal and financial IP advice on IP. And a great management team to realise IP and valuation opportunities.
Peter Eales BA Hons Chartered Marketer FCIM FIDM
Founder Director Dorset Business Angels
MD o i solutions limited