Step 10. Establish a Value. Establishing a value for intellectual assets is a difficult task and will be covered in more detail later in this chapter. A pioneering patent with broad, valid claims in a thriving industry which can be used to effectively block all competitors is significantly more valuable than a patent tractor towards a minor improvement in a manufacturing process which will be used by only the patentee. Other factors which parties consider negotiating the price for intellectual assets are as follows:
Income Streams. The most quantitatively defined aspect of a merger, acquisition, joint venture, or alliance transaction is the income stream generated from licensing. Past and projected royalty income is generally well-defined and affects the price of the assets.
Past Experience of the Parties. Based on the past experience acquirers and contributors can assess what price for the intellectual assets is reasonable. Details of valuation methods for intellectual assets is discussed later in this chapter.
Industry Practices. The extent such information is available, the parties can evaluate comparable experiences of others in the industry.
Relative Bargaining Position. Whenever contributor requires an immediate infusion of cash, the acquirer may be in a superior negotiating position. On the other hand when acquiring a contributor’s assets is essential for an acquirer to continue participating in the market, the contributor is in the superior negotiating position. Either circumstance clearly affects the price paid for the assets.
Non-Competition Arrangements. A contributor who agrees not to compete with the acquirers is likely to command a higher price for the intellectual assets.
Other Considerations. Acquirers may require assurance that they are receiving rights and all pending applications to registration of various intellectual assets.
The above describes the major elements that should be assessed during the due diligence process for Mergers, Acquisitions, Joint Ventures, Alliances, etc. How this fits in an overall three phase due diligence process was described by Jim Malackowski in a talk on Due Diligence in an Intellectual Capital Focused Investment, shown in the “Phases of Due Diligence” figure.