Being engaged in an economic activity, whether on your own or in the form of a company, inevitably involves managing the property of your enterprise.
So, what is the importance of the property in the context of an enterprise?
It is first necessary to consider the context of the property of an enterprise in the light of definitions applicable in the business and legal world. Indeed, an enterprise is defined in three basic ways. In the subjective meaning, it is a separate property body belonging to a specific legal person, this body being a subject of legal relations in trade. In the functional meaning, on the other hand, it is a specific economic, profit-making, purposeful and professional activity.
Again, according to the objective meaning, an enterprise is a property set, as defined in Article 55(1) of the Civil Code. This set includes, inter alia, a designation distinguishing the enterprise, patents and other industrial property rights, copyrights, secrets of the enterprise, concessions, licences, permits and, of course, movable and immovable property.
The legislator has deliberately made the concept of the property of an enterprise an open catalogue. Given all the meanings of the phrase and relating them to the provisions of the Civil Code, it can be concluded that the property of an enterprise includes everything that serves to perform the functions of an enterprise, in any of the meanings referred to above.
In the case of enterprises that, by law or voluntarily, keep books of account (so-called full accounting), their financial statements are prepared periodically for control and reporting purposes. One of the elements of said statements is the balance sheet, which includes assets (property) and liabilities (sources of asset financing). Under assets, individual components of property, including intangible and legal items, are presented as amounts (values). Said items include exclusive rights held by the enterprise, such as patents for inventions or trademarks.
What is a patent for an invention and how to record it under the property of an enterprise?
As defined by the Industrial Property Law, a patent is granted for an invention that meets the criteria of novelty, inventive step and industrial applicability. A patent is an exclusive, territorial right that provides a time-limited monopoly to the holder to use the subject-matter of the patent in their economic or professional activity for a maximum of 20 years from the priority date (usually the date of the first application) and subject to payment of fees for subsequent periods of protection.
In the course of conducting economic activities, solutions are often created or acquired that can be or are already covered by patent protection. Obviously, this involves certain outlays, whether in the form of direct financial and non-financial costs associated with the creation of the solution, or costs associated with the purchase of a licence or the acquisition of the solution itself.
In order to be able to record that under the property of the enterprise and, in the case of purchasing a solution, to determine the purchase price, the amount of licence fees or the value of the exclusive right itself for financial reporting purposes, intangible and legal items being components of the property of the enterprise are valuated. The valuation of patents, trademarks or related licences is a highly specialised activity, involving both market, financial and legal knowledge and a certain kind of flair or even artistry. A multidisciplinary approach to both the analysis of the object of valuation and the legal and economic landscape, the ability to critically assess and select assumptions and to search for data in external sources translates into determining the final value of a patent or any other intangible component of the property of an enterprise. Once a specific financial value has been obtained by means of a specialised valuation, it is included under an appropriate heading on the asset side of the enterprise's balance sheet.
Patent is valued. What's next?
Assigning a specific financial value to the object of the valuation and including this asset in the balance sheet of an enterprise opens up a number of ways to use the exclusive right in business trading. It is clear that the patent holder has the right to use the subject-matter of the patent in its day-to-day operations and to pursue claims against infringers of their exclusive right.
However, in view of the fact that exclusive rights are traded and can be, inter alia, inherited, the right holder, knowing the financial value of their patent, gains an even wider range of ways to exploit their right and build further competitive advantages based on it, in particular by:
- sale of the right or granting of a licence – based on the valuation of a patent, it is possible to sell it at the market price or to set a licence fee rate in the case a licence is granted (be it exclusive, non-exclusive, full or limited) to an external entity or entities. The granting of a licence is subject to registration with the Patent Office. The granting of a licence is a frequent element when building franchise networks, where the franchisee, in return for a fixed or variable annual fee, obtains from the right holder a non-exclusive licence to use the trademark or the entire visual identity of the franchisor;
- in-kind contributions and M&A transactions – a valued patent may be contributed as a non-cash property component to a new company (or contributed to an existing company, for example when a new partner joins), in exchange for a specific pool of shares. In addition, in M&A transactions, the valuation of intangible and legal items is an important element of the so-called goodwill, which is recorded on the assets side of the acquiring enterprise following the completion of the transaction;
- pledge – the valuation of a patent (or any other exclusive right) also makes it possible for this right to be pledged as collateral for an investment loan or any other type of financial transaction aimed at rapidly increasing the scope of activity or expanding the profile of activity of the enterprise. For example, a patent for an invention, the subject-matter of which is, or is expected to be, an important and strongly developing part of the enterprise, may be pledged. The pledge itself may be used to collateralise a bank loan for the expansion or construction of a new production hall, when the value of the loan being granted exceeds or oscillates around a percentage value of the investment that may make the financing bank resist to take a decision. Pledging an exclusive right requires registration with the Patent Office;
- debt enforcement – conducting economic activity inevitably involves financial risks. In the event of failure, the claims of creditors enforced by the bailiff may be satisfied from the valued patent. Enforcement against a right is entered into the register of the Patent Office and the claims themselves may be satisfied from the sale of the valued right or from the proceeds from this right (e.g. from due licence fees). This is why it is of great importance to know the amount of the property of the enterprise accumulated in industrial property rights in this very context of a "safety valve" in case of unfavourable economic events.
To sum up, holding an exclusive right (e.g. a patent for an invention) is undoubtedly a competitive advantage for an enterprise, but it is the valuation of this right and its inclusion in the recorded assets of the enterprise in the balance sheet that can provide a springboard, the use of which can multiply the benefits derived from the fact of holding an exclusive right.
An excellent example of using industrial property rights as components of the property of an enterprise are large tech corporations such as Apple or Microsoft, whose brand values (including the value of intangible components) at the end of 2023 were estimated in Interbrand's Best Global Brands 2023 report to be more than USD 500 billion and more than USD 316 billion, respectively. This value originates mainly not from fixed assets (real estate, machinery, tools), but just from the exclusive rights (patents, trademarks) they hold and the hidden know-how, their valued databases or value estimates of other intangible components of their property, which, although not publicly known, also add real value to the property of the enterprise. With their high value, these entities have both an easier way to raise funds for further development investments in cooperation with financing entities and a powerful shield if they fall into temporary financial problems. Furthermore, as stock exchange-listed companies, by including the valuation of intangible and legal items in their assets, they positively influence the book value of the company. As a result, in this way, they can indirectly influence capitalisation by showing more favourable balance sheet values to potential shareholders. Conversely, they may to a greater extent adjust the value of assets in response to the share demand curve shifting to the left.
Therefore, when conducting economic activity, it is good to look at the giants and benefit from their knowledge and experience also as far as broader use of your own industrial property rights is concerned. Knowing the value of the property of the enterprise accumulated in industrial property rights is one of the many effective sources of building a competitive advantage on the market. In the Polish market, this strategy is still rarely used in the process of creating business plans or when considering activities that go beyond the standard approach of gaining exclusivity for small fragments of the market carved out by the scope of protection of an exclusive right – for example, a patent for an invention.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.