UNDERSTANDING THE VALUE OF YOUR INTANGIBLE ASSETS (PART 1)
All too often, business owners become so involved in the day-to-day operations of their business that they forget to manage their intangible assets. Failing to properly manage and protect these assets may mean you leave money on the table when selling your business or limit your chances of getting the full amount of venture capital or bank financing you may need at a crucial time.
Of course, to properly manage these assets, you must first understand the nature of the most common types.
Intangible assets (commonly referred to as intellectual property or IP) are creative works that cannot be physically touched, but may:
- identify a business, product or service,
- entail special formulas or processes that constitute the product or service itself, or
- include authorship of exploitable original creative works such as songs, books, audiovisual works, software, art, et cetera.
Trademarks and Service Marks: Trademarks and service marks serve to identify the source of business products or services. They include a company’s name or logos and the names of its products or services (for example, Coke® for soda or AMC® for cable television broadcasting and movie theater services). Company slogans also qualify as important source identifiers and can increase brand awareness—think of Nike’s Just Do It® campaign for athletic wear.
Patents: Unique formulas or processes can lead to proprietary patents that gives a business the exclusive right, for up to 20 years, to exploit a particular product or particular business process to the exclusion of all competitors. This monopoly often leads to increased profitability or a market advantage over the competition. Examples of companies who have used patents to disrupt their industry and garner a financial edge include Amazon.com with its patented 1-Click® online ordering process and Pfizer which obtained a patent on the first oral medication approved for erectile dysfunction (Viagra®).
Trade Secrets: Trade secrets include those formulas, recipes, processes and data that create a unique product or service no one can figure out how to duplicate and for which the owner has taken demonstrable action to keep absolutely secret and confidential. Companies that have used trade secrets to financially outpace their competition include Coca-Cola (with its trade secret formula for Classic Coke), KFC (with its trade secret Original Recipe for chicken) and Google (with its original and unknown search engine algorithm).
Copyrights: Copyright provides protection for all original works of authorship reduced to a tangible medium of expression (e.g., discernible by touch, sight or sound). Copyright protection is available for numerous items like books, songs, videos, sculptures, photographs, sketches, architectural drawings, and works of the performing arts—just to name a few. Copyright ownership gives an author or business the exclusive right, where applicable, to:
- reproduce the work,
- prepare other works based upon the original work (derivative works),
- distribute the work for sale or other transfer of ownership,
- perform the work publicly,
- display the work publicly, and
- perform the work publicly by audio transmission (e.g., radio or television).
These exclusive rights may be licensed, sold or otherwise exploited in any manner the copyright owner chooses.
The value of any of the foregoing assets will depend upon the extent of the rights a business has in the assets—exclusive versus nonexclusive. The easiest way to demonstrate exclusive rights is to have state and federal trademark registrations (as applicable), copyright registrations, issued patents or demonstrable protection of trade secrets. Nonexclusive rights often result from licenses or other contractual agreements. Once you are clear about the types of intellectual property you have and the extent of your rights in that property, you can consult with a valuation expert to determine the potential dollar value of those intangible assets.
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