Thursday 19 June 2008

IP Valuation - the basics!

Jason Lessard put together this article for the readers of his Uroip site. It is quite a useful summary of the basics of IP Valuation. Thanks Jason.

"The growing importance of Intellectual Property Rights (IPRs) in business has created a need for equating the cost of obtaining these rights with the value they add to the business. A decision to invest or not to invest in patent protection, or indeed any IP registration, should be subjected to similar criteria as tangible assets.

However, IPR valuation is complex and the results can be meaningless if the wrong methodology is used to carry out the analysis. For this reason, all too often the decision of whether or not to file a patent application is based on intuition and experience. This is clearly not an ideal approach to decision making.

As with the evaluation of any investment, estimating the projected value of the resulting asset and comparing this estimate to the projected costs of obtaining and/or maintaining it will allow you to make more educated investment decisions. A well thought out and consistent approach to valuation will give you both an indication of value and a means for comparing the relative value of your innovations to decide how your R&D budget should be allocated.

Two of the more popular methodologies are the market approach and the income approach, each of which comes with its advantages and disadvantages.

The market approach is based on IP transactions involving similar technologies which have taken place in similar markets. This valuation method usually reflects more accurately the actual amount that a third party would be willing to pay for the asset. However, it is generally difficult to obtain accurate information as the results of such transactions are rarely published.

The income approach is based on an estimation of future income attributable to the particular IP asset in question. The relief-from-royalty method is a subset of the income approach, wherein the value of the IP asset is calculated based on notional royalties that the company is relieved from paying as a result of owning the assets. The royalty rates can be estimated based on industry standard ranges in the relevant field of technology, but these should be adjusted using pre-defined criteria indicative of, for example, the strength and/or scope of the IPR in question. This will provide more accurate and consistent results.

While this approach is somewhat superficial, the value obtained by this methodology is reasonably accurate in most cases. More importantly, it is a consistent indicator which allows you to compare relative values for decision making purposes."

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