Intellectual Property Valuation Techniques

Intellectual Property Valuation Techniques

For this week’s blog, I read up on the valuation techniques for intellectual property from IP metrics, an intellectual property consulting firm.

http://ipmetrics.net/IPVT.pdf

Some of the methods they have are summarized below.

1.     The cost approach – this cost approach just refers to valuing an intellectual property based on how much it cost to develop. It is very simple and intuitive to understand. There are 2 methods here – one is the cost of reproducing the technology and the second way is the cost of replacing the technology in the event that it is lost.

2.     Market approach – this valuation style is used in a way that is similar to value tangible assets. So the way to find out the value of an IP from the market approach is through looking at comparable transactions that have occurred before. Obviously no technology is exactly similar, so this is one key flaw of this method.

3.     Income approach – This approach is similar to the DCF (discounted cash flow method) in basic finance. This is where an IP is valued based on the future cash flows that it is expected to generate, discounted back to the present year to account for the time value of money.

4.     Relief from Royalty – this method involves valuing an IP based on the royalty fees that you would get from the IP that you have. IT is complex and takes into several factors including licensing agreements, exclusivity, geography, etc.

This reading on the different valuation techniques is relevant to the class because this is what Foresight does as a business in IP valuation. The company finds out through various methodologies how much intellectual property is worth and how to use these IP for the advantage of their clients.