Another important method used for IP valuation is Market based method. In market based method the IP is valuated from the data available in market. There are several methods used to valuate an IP from market data. In the below sections we have discussed few of those methods, their usage scenario and advantages/ disadvantages.
Market capitalization method: In this method of the IP valuation, value of IP is determined from the balance sheet and market capital of a company. This method is easy to implement as the data needed for this method is readily available, but this method suffers from error.
Typically we can think of three factors which contribute to market capitalization of a company. The first one is total net tangible asset; second one is value of identifiable intangible asset which is nothing but patent, copyright hold by the company and the third one is value of unidentifiable intangible asset which is basically the goodwill.
So market capitalization = net value of tangible asset + value of identifiable intangible asset (patent, copyright) + value of unidentifiable intangible asset (goodwill)
Value of identifiable intangible asset (patent, copyright) = market capitalization – net value of tangible asset – value of unidentifiable intangible asset (goodwill)
Market capitalization = share price x number of share issued (available from exchanges where the shares of the company are traded)
Net tangible asset = Total tangible asset – total liabilities (available from the balance sheet of the company)
There is no standard method of determining the value of goodwill, but as rule of thumb one can takes 10% to 15% of the market capitalization of a company as goodwill.
The main drawback of the method is that it gives a total value of the patents, copy rights hold by the company, not the value of individual patent/ copyright. The method may be useful for small companies who has patents in one or two areas, but typically those companies are not traded in public and hence getting the data on market capitalization is not easy.
Market Transaction Method: In this process of IP valuation, the value of IP is determined by the deal happened for comparable IP. This gives a quite good estimate for the IP value because it gives more realistic number how market value the IP, but one should take care of the following:
The major issue with estimating IP value from market transaction is that most of the IP deal happens in private and getting information on deal value as well as details of deal is tough.
In our next article, we’ll discuss IP Valuation using option method.
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