Why Forensic Accountants Undervalue IP and How It Impacts Businesses
Why Forensic Accountants Undervalue IP and How It Impacts Businesses
Introduction
When Bed Bath & Beyond filed for bankruptcy, its intellectual property assets were sold for just $21.5 million. Shortly after the purchase, Overstock.com’s market cap skyrocketed by $600 million—all because Bed Bath & Beyond’s IP was grossly undervalued and sold far below its potential. Overstock acquired a customer list of 9.6 million active users and a trusted brand name at just $2.23 per customer—a fraction of the typical acquisition cost of $10–$20 per active customer.
This example highlights a common problem in business valuation: intellectual property (IP) is often misunderstood, ignored, and undervalued—especially in business sales, bankruptcy proceedings, and divorce settlements. Without proper valuation, business owners leave significant money on the table.
Why Forensic Accountants Often Get It Wrong
Forensic accountants typically focus on financial data and tangible assets when conducting business valuations. There are two primary roles they play with IP:
- Valuing IP in a sale, dissolution, or bankruptcy. In this scenario, they often lump IP into an EBITDA or revenue multiplier without recognizing the business opportunities the IP could unlock.
- Calculating damages in IP litigation. Here, they are more likely to accurately value the IP based on its actual market potential and financial impact.
However, in most business valuations, forensic accountants rarely have the expertise to fully understand IP’s strategic value or the broader business case behind it.
Tangible vs. Intangible Asset Valuation
Valuing tangible assets—such as machinery, buildings, or inventory—is relatively straightforward. The market for these assets is well understood, and comparable sales (“comps”) are easy to find.
In contrast, intellectual property is unique. The value of intellectual property—such as brands (trademarks), proprietary data (trade secrets), patents, and creative works (copyrights)—is determined by the nature of the IP itself, how well it is protected, commercialized, and recognized within its industry. Its true worth depends on market presence, strategic positioning, and whether it can be licensed, sold, or leveraged for competitive advantage, allowing some IP assets to command significantly higher value than others.
The Risks of Undervaluing IP
Divorces: Why Improper IP Valuation Can Cost Millions
In divorce settlements related to family businesses, it’s not uncommon for forensic accountants to assign IP a value of zero. This undervaluation can lead to one party losing out on significant potential gains. Innovation, research, and development are expensive, and just because an IP asset hasn’t been fully commercialized doesn’t mean it lacks value. Often, the foundation has already been set for future scaling and growth.
Business Sales and Bankruptcy: Lost Negotiation Leverage
In business sales and bankruptcy proceedings, undervaluing IP reduces the company’s overall sale price and weakens negotiation leverage. For example, Bed Bath & Beyond’s IP sale to Overstock left tens of millions of dollars on the table because the value of its customer list and brand loyalty was overlooked. Proper IP valuation could have dramatically changed the outcome.
Key Takeaways for Business Owners, Divorce Attorneys, and Small PE Firms
Every business has some form of intellectual property. A thorough review by an expert who understands both business strategy and IP can help:
- Identify underutilized IP assets
- Ensure those assets are properly protected
- Explore opportunities to monetize them
Not all IP is equal—each IP asset is unique and needs to be evaluated on a case-by-case basis.
Steps to Ensure Accurate IP Valuation
Relying solely on legal counsel is not enough. Patent and trademark prosecutors protect IP, and litigators defend it, but business experts help you understand the broader business case behind the IP.
In one situation, Prosperity Advising helped a business owner secure exclusive ownership of an industry-specific brand that resulted in a significant premium on the sale price of the company. In another case, leveraging IP as a negotiating tool kept discussions open with business partners, ultimately leading to a successful buyout that satisfied all parties involved.
Conclusion: Don’t Leave Money on the Table
Intellectual property is a unique asset class that requires specialized expertise. If you’re preparing for a sale, navigating bankruptcy, or involved in a complex business dispute, ensure your IP is valued by someone who understands both your business and its potential.
Need help identifying and maximizing the value of your business’s IP? Contact us to learn more.
Also published in The Prosperity Perspective
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