Intellectual property valuation


is considered as one of the most critical areas in finance; it plays a key role in many areas of finance such as buy/sell, solvency, merger and acquisition.

Rationale

There are numerous individual reasons or motivations for conducting an intellectual property valuation or economic appraisal analysis. A valuation is prepared, for example, for transactions, pricing and strategic purposes, financing securitization and collateralization, tax planning and compliance, and litigation support.

Factors driving the value of intellectual property

Intellectual property derives its value from a wide range of significant parameters such as usefulness, market share, barriers to entry, legal protection, IP's profitability, industrial and economic factors, growth projections, remaining economic life, and new technologies.

Approaches

The valuation process necessitates gathering much more information as well as in-depth understanding of economy, industry, and specific business that directly affect the value of the intellectual property. Therefore, such information may be gathered from external and / or internal sources. Finally, the information is devoted to be turned into financial models to estimate the fundamental value of a particular type of intellectual property based on such adapted International Valuation Standards.
The valuation analysts use numerous approaches in order to reach a reasonable indication of a defined value for the subject intangible assets on a certain date which is referred to as the valuation date. The most common approaches to estimate the fundamental or fair value of the intellectual property are defined as the following:
  1. Cost approach: The cost approach is based on the economic principle of substitution. This principle states that an investor will pay no more for an asset than the cost to obtain, by purchasing or constructing, a substitute asset of equal utility. There are several cost approach valuation methods, the most common being the historical cost, replacement cost, and replication cost.
  2. Market approach: The market approach is based on the economic principle of competition and equilibrium. These principles conclude that, in a free and unrestricted market, supply and demand factors will drive the price of an asset at equilibrium point. Furthermore, it provides an indication of the value by comparing the price at which similar property has exchanged between willing buyers and sellers. Data on such similar transactions may be accessed in several public sources, including specialized royalty rate databases.
  3. Income approach: This approach estimates the fair value of intellectual property by discounting the future economic benefits of ownership at an appropriate discount rate.
  4. Direct approach: The direct approach is based on the current value of shares of intellectual property in an Intellectual Property Share Market.
  5. Using the pay-off method on top of the four above mentioned methods is a way to enhance the valuation and analysis of intellectual property