Valuation is the process of estimating or fixing for monetary or other value, of a particular item, typically done by a professional evaluator. Intellectual Property (“IP”) valuation specifically determines the monetary value of subject Intellectual Property Rights (“IPRs”). According to the World Intellectual Property Organization (“WIPO”), IP assets are intangible assets created by law, legally protected and enforceable. IP assets including patents, trademarks, industrial designs, trademarks, copyrights and trade secrets can be independently identified, are transferable, have an economic life and can be exploited to generate economic benefits.
For an IP asset to be considered valuable, it should generate measurable financial returns, such as sales, licensing fees, or royalties. IP valuation helps quantify the worth of IP and enhances the value of associated assets, aiding companies in making informed commercial decisions.
Legal framework for IP valuation in Kenya
While Article 40(5) of the Constitution of Kenya, 2010 requires the Government to support, promote and protect the IPRs of the people of Kenya, the Parliament has yet to enact any legislation that provides for IP valuation procedures in Kenya. Significant strides have however been made with the enactment of the Movable Property Security Rights Act, 2017 (“MPSR Act”). Prior to this, it was not possible to secure financing in Kenya using IP assets, as they were not recognised as capable of forming security. The MPSR Act now recognises IP as an intangible asset and a form of collateral for loans and other financial obligations.
Methods of IP valuation
Currently, the law does not provide a stand-alone mechanism to value IP. However, WIPO has provided methodologies that can be adopted in Kenya’s IP valuation practice. These methodologies are broadly categorised into; Qualitative approaches and Quantitative approaches.
Qualitative approaches to IP valuation
This method of IP valuation deals with inferred calculations of the value of the IP asset in no monetary terms. This method determines the value of an IP asset by relying on factors that are considered proxies for IP value and is mainly used internally by companies for management purposes and decision-making.
Quantitative approaches to IP valuation
This valuation method is mostly employed by expert valuers and is globally adopted in the IP valuation practice across different markets. There are three key techniques used in quantitative IP valuation: the cost approach; the market approach; and the income approach.[1]
Challenges by stakeholders in IP valuation in Kenya
The valuation of IP in Kenya is hindered by a confluence of factors that limit its commercialisation and use as collateral. These challenges include:
- Lack of valuation professionals: There are not enough specialised IP valuation professionals, leading to the potential undervaluation of IP assets.
- Insufficient valuation services: The MPSR Act does not address the valuation of intangible assets, making it difficult for financial institutions to use IP as collateral.
- Intangible nature of IPs: The intangible nature of IP makes it hard for lenders to grant credit as it does not provide security in case of default.
- Infringement risks: IP infringement can lead to unpredictable royalty income, reducing the attractiveness of IP-based securitisation.
- Absence of a liquid market: There is no established market for IPs, making it difficult to ascertain their market value and convert them into cash.
- Lack of unified law: Existing laws do not adequately address IP valuation, hindering the commercialisation of IP assets.
Conclusion
IP valuation offers a transformative opportunity for Kenya’s economy by fostering innovation and entrepreneurship. Establishing robust legal and institutional frameworks, along with adopting global best practices, can unlock significant economic benefits, including job creation, increased tax revenues, and a more competitive market. Ultimately, IP valuation is not just a technical exercise; it is a strategic imperative for Kenya’s development. By embracing this opportunity and taking proactive steps to strengthen its IP ecosystem, the country can position itself as a regional leader in IP valuation for long-term prosperity and global competitiveness.
[1] World Intellectual Property Organization (WIPO), ‘Expert Consultative Group on Valuation of Intangible Assets’ (WIPO, 2023) https://www.wipo.int/edocs/mdocs/mdocs/en/wipo_hl_ip_ge_23/wipo_hl_ip_ge_23_paper2.pdf accessed 5 September 2024.
