HOW TO SEPARATE IP VALUE FROM ENTERPRISE VALUE
Why would a selling company want to know the value of the IP in a business? When isolated, the IP will drive a higher price. There are several methods to accomplish and justify this split. Your analysis should clearly delineate your process to differentiate IP returns from tangible assets or general operations.
Core Separation Techniques
- Relief from Royalty (RfR) Method – Calculates the present value of the royalty payments a business would be “relieved” from paying if it owned the IP rather than licensing it from a third party. This approach applies market royalty rates to projected revenues.
- Multi Period Excess Earnings Method (MPEEM) – Isolates IP value y subtracting the returns attributable to all other “contributory” assets (working capital, and fixed assets) from the total business cash flow. The remaining “excess” is attributed to the primary IP.
- With and Without Method (Differential Method) – Compares the total enterprise value in two scenarios: one where the business owns the IP and one where it does not. The value of the IP is the difference between these two valuations.
- Profit Split Method – Allocates a portion of the total business operating profit to the IP based on its relative contribution to the value chain. This technique uses comparable licensing data to determine the appropriate percentage split.
- Comparable Exchange or Sales – Access to specific IP sales data is very limited, as IP is usually sold as part of an enterprise. The best approach is to review public company business purchases and calculate the amount of IP allocated on the balance sheet versus the total business value.
When you know your value, you are in the best negotiating position.