How to Value Intellectual Property

Intellectual Property Consultants generally have a choice between four valuation methodologies when establishing a fair market value for intellectual property. Depending on the information available and the situational context, different valuation methodologies are used.

An expert intellectual property consultant will be able to analyze the strengths and weaknesses of each method depending on 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.



 Intellectual Property Valuation Methodologies

Below, are the four generally accepted Intellectual Property Valuation methodologies:
  • Market Approach
This approach is dependent on observable and comparable market transactions. Intellectual property is valued by comparing the assets in question to transactions involving similar assets in similar markets. This comparison provides a reasonable indication of value if an active market exists.
  • Cost Approach
This approach relies on the replacement or historic cost to derive value. Historic cost is the cost to replace an asset at the time the asset was acquired. Replacement cost is the cost that must be incurred if the assets were purchased today. This approach is generally used to establish a minimum value of an IP asset.
  • Income Approach
The income approach is the most widely used method to determine the value of intellectual property. The income approach calculates the present value of future income streams attributable to the IP. This method utilizes forecasted financial results based on factors such as historical financial results, industry trends, and the competitive environment.
  • 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 of these approaches, among others, are weighed by our qualified intellectual property consultants in order to determine the appropriate methodology to use in a particular valuation scenario. Please contact us by email at info@consor.com or by phone at (858) 454-9091.

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