CONSOR’s last post in the IP Valuation series concentrated on the Cost Approach. Another important valuation methodology to use is the Market Approach. Remember, it is important that at the beginning of the valuation process, all the different methodologies available to value the particular set of intangible assets are considered.
The market approach to valuation of intangible assets is used just as it would be for a tangible asset valuation. In other words, the intellectual property or intangible assets are valued by comparing them to recent sales, transfers and transactions that involve similar assets in similar markets (the greater the similarity, of course, the more suitable the transaction is for comparison purposes). As the name implies, the market approach to the valuation of any asset, tangible or intangible, is most applicable when a truly active marketplace exists and actual transactions can be found.
Even where an active marketplace can provide market comparables, the similar transactions used also must be adjusted to reflect the differences among the transactions, and the differences in the intellectual property or intangible assets being valued.
The market approach to valuation has traditionally been used with tangible assets where active markets have existed for decades, in areas such as real estate, equipment, and raw materials. However, most intangible assets, at least until recently, have not been bought and sold frequently enough to be able to establish a value based solely on direct market-based comparables; therefore, analysis and adjustment are almost always necessary. In addition, intangible asset transactions are often cloaked in several layers of confidentiality.
Therefore, it is typically difficult to get enough detail on each of the similar or comparable transactions to be certain that all of the elements of value that make for a comparable to be used in the market approach have been appropriately considered. On the other hand, because the market approach utilizes actual transaction data to the maximum extent possible, and values are derived from the sale, transfer, license, or other activity of similar assets, it is increasingly the preferred approach – if the necessary data can be found.
Using the market approach depends on finding one or more comparable transactions and then extrapolating those comparable transactions to the value of the IP under review.