Clack. Clack. Clack. Clack. That’s the sound the balls in the image on the left make when one of the end balls is swung into motion to collide into the chain of balls, transmitting its force invisibly through the series to the ball at the opposite end.
The impact an event can have on a business transaction, and in particular an IP transaction or IP strategy, is a matter of assessing the risk associated with the event. The relative “force” that the event can impart is known as its impact factor. Not all risks are equal in importance, and not all risks are equal in their cost to clarify.
While due diligence involves the clarification of legal situations to provide a better understanding regarding the consequences in valuing a patent or patent portfolio through patent search and patent analysis, a lack of clarification means uncertainty, and uncertainty means risk. All risk needs context to be useful – a proper framing to appraise the force factors.
Determining a quantitative or qualitative value of risk related to a situation or holding and a potential threat (or hazard) is the domain of risk assessment. Assessing risk is the first step in knowing how to manage it. Quantifying the magnitude of a potential loss and the probability that the loss will occur is the basis for assessment. Risk assessment consists of an objective evaluation of risk in which assumptions and uncertainties are clearly considered and presented.
In such cases, one has to apply a risk premium (an interest rate or probability) to the patent valuation. In other words, if you don’t “do” diligence, then you have to discount. The risk-free patent value minus legal risks equals the resulting patent value. Mathematically,
patent value = (risk-free patent value) * (1 – discount).
Synergistic portfolio discounts can also amplify or compress valuations due to a combination of IP threats. Information asymmetry factors into the equation as well. Concealment, deceit, incomplete communication, or information too difficult or too costly to obtain are all hazards that can shift the economic analysis to one that focuses on concern of the glass being half empty more than half full. That is, besides obtaining a valuation that more accurately reflects a true value, risk assessment can also initiate a new type of dialogue on what are the concerns that need to be focused on the most regarding an IP strategy.
In addition, determining the discount rates becomes the secret sauce of every risk-assessment engagement – each chef has his own recipe. The value of a patent depends on the knowledge of the evaluator and the implicit legal assumptions made. The choice of which legal and technical aspects to consider (such as freedom to operate and validity in the patent-search and patent-analysis activities), and what weight to give them, affects the analysis dramatically. FlashPoint IP’s risk-assessment framework has been validated by Pricewaterhouse Coopers (PwC) and Deloitte.
FlashPoint IP, a leader among intellectual property firms, endeavors in this regard to provide an enlightened perspective for its clients to move forward with business ventures with the assurance of being well-informed. FPIP strives to implement these diverse issues into a unified framework, using patent search and patent analysis in a business context. Our engagement managers are adept at synthesizing the many facets needed to create a winning formula for your IP. Contact us to discuss your options regarding IP strategy and positioning, and how best to advance your business interests.