IP Valuation During Divorce Proceedings

Statistics show that anywhere from 40% to 50% of marriages end in divorce. During a divorce, the couple divides assets, including homes, furniture, vehicles, and possibly intangible assets, such as intellectual property (IP). However, discovering the value of IP can be a complicated process. It becomes even more complicated when IP owners enter an engagement with preconceived notions.

IP valuation relies on many details for an appropriate and credible result. The same holds true when IP owners face a divorce. However, the details necessary for a credible and defensible valuation in the context of divorce proceedings involves considerations that may be different from that of another context in which the IP is valued. In fact, every IP valuation involves details that are pertinent to that particular entity; thus, making every single valuation unique in its own right. However, oftentimes, an IP valuation in the context of divorce proceedings often presents its own challenges.

The following five aspects make IP valuations during a divorce challenging:

1. False expectations. Many times, IP owners assume the value of their IP is much higher than its actual worth. Therefore, they enter into an IP valuation engagement with a particular value amount in mind. However, a credible valuation analyst reviews all aspects of intellectual property to determine an accurate value. Oftentimes, the amount the IP owners expect a valuation to reveal is considerably understated compared to their expectations.

2. Stage of IP. Most often, the IP is in the early stages of development. Therefore, it is often unproven. Without a workable invention and/or market acceptance, it is likely the IP does not hold much value.

3. Battle of valuation experts. Many valuation practitioners may seem appealing. However, without good knowledge of the industry and what IP valuation entails, IP owners may mistakenly choose a firm that does not have the background needed to provide a fair value determination on the IP at issue. This may lead to a contentious legal battle among valuation experts hired by opposing parties, thus increasing the cost of litigation.

4. Personal goodwill. There might be a certain element of personal goodwill attributable to the IP. This means that one party may have more invested in the IP, such as relationships, skill, knowledge, reputation, and others that an IP valuation analyst would have to consider in the valuation. However, in the event of a divorce, the personal goodwill may not matter if a judge determines an asset should be split evenly.

5. Capitalization. IP often requires a certain degree of capitalization, which gets cut in half as soon as the divorce takes place.

As indicated, IP owners must consider aspects about their IP and a potential valuation in divorce proceedings to determine whether hiring a valuation expert is worthwhile. As listed, many of these aspects can be disappointing, which is why IP owners going through a divorce often forego an IP valuation. They may not want to split assets based on their level of individual goodwill. They may not want to spend the money for an IP valuation to discover that the IP has no value. Either way, a competent IP valuation analyst would bring up these aspects the moment IP owners request an engagement. From there, the IP owners can determine whether a valuation is worth their time and money.