Intellectual Property Valuation Methods

The Market Approach

In this method, intellectual property and intangible assets are valued by comparing the assets in question to transactions involving similar assets that have occurred recently in similar markets. This approach is best if an active market exists that can provide several examples of recent arm’s-length transactions that include adequate information on their terms and conditions.

The Cost Approach

The historical cost to develop the asset is sometimes used to determine its value. This method does not necessarily give an indication of the economic benefit derived through ownership and utilization of the Subject IP. Rather, it provides an absolute minimum value for the Subject IP.

The Income Approach

This approach is based on determining the future income stream attributable to the subject asset under consideration. This approach is one of the most widely used methodologies in intangible asset valuation because the information required is often reasonably accurate and readily available.

The Relief from Royalty Approach

A variation of the Income Approach that establishes the value of the intellectual property as the capitalized value of the royalties that the company is relieved from paying due to its ownership of the assets. This method uses royalty rates that are based on marketplace transactions as in the Market Approach, and uses a forecast of revenue as in the Income Approach.

Each methodology has strengths and weaknesses that depend on the data available related to market factors, such as historical results, industry trends, and the competitive environment, as well as the specific characteristics of the asset(s) being valued and the degree to which they are being exploited. All of these considerations, among others, are weighed by our qualified experts in order to determine the appropriate analysis method to use in a particular valuation scenario.