How Do Intangible Assets, Patent and Brand Name Affect the Value of a Company?

What are Intangible assets?

An intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is identifiable when it is separable or arises from contractual or other legal rights. Examples of intangible assets include goodwill, brand recognition, copyrights, patents, trademarks, trade names, and customer lists. You can divide intangible assets into two categories: intellectual property and goodwill.

How do Intangible Assets Affect the Value of a Company?

Intangible assets have a positive effect on firm value. We will discuss the case of two intangible assets - patents or trademarks.

The case of patent

A patent is an exclusive right granted for an invention. In other words, a patent is an exclusive right to a product or a process that generally provides a new way of doing something or offers a new technical solution to a problem. 

A patent adds to the company's value because the company can use the patent to allow other companies to produce products. Then it can receive periodic rewards or use to make products based on it.

When you hear that the company receives a patent, the thought immediately arises that the value of the company is expected to increase. This is true. But as far as the patent is concerned, it is necessary to examine what stage it is in.

In regards to patents - two main factors need to be checked:

1. Is a company about to apply for patent registration? A patent application can add value to a company once the patent if accepted. When evaluating the value of a company that has applied for a patent, one should test two issues.

• What are the chances of the application being accepted?
• When is the application expected to be accepted?

If the chances of acceptance are low, the company's value is not expected to increase or even decrease. The decrease in the company's value can occur in case of past expectations that the company would receive the patent, which caused the estimation of high value.

1. Does the company have a valid patent? A valid patent increases the value of the company. When evaluating the value of a company with a registered patent - it is important to check two things:

• When is the patent expected to expire?
• What is the company's chance of extending the patent?

The company's value is expected to decrease when the patent expires because more competitors will enter the market.

The case of Brand name

Does the company have a registered brand name? A brand name identifies a specific company, product or service and differentiates it from similar brands within a category. The company's brand name represents who the company is and what the client does with its products. A client will never be attracted to a familiar brand name that has no thought. Therefore a brand name can increase the value of the company.

The Patent Cycle

To explain the patent's effect on the company's value, we like to use the name the Patent Cycle. 

The cycle has three main points:

Obtaining a Patent

When a company receives a patent, the value of the company will be maximum.

Patent Expiration: When a patent expires, the company's value is expected to decrease.

Patent Expectations

If there are expectations that the company will file a patent, the company's value is expected to increase.

Infografics: Patent cycle

(If you like - you can use it but you should add a link to Equitest's site)

Conclusion

In this article, we have discussed the impact of ןntangible assets on valuation. Suppose you are looking for an easy and straightforward way to evaluate your business, manage your cap table, or create a pitch deck. In that case, you can try our intuitive ai based business valuation software or our business valuation calculator, or you can contact us for free advice or schedule a demo.