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IP Valuation – Market Based Method

August 22, 2014

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)

So,

Value of identifiable intangible asset (patent, copyright) = market capitalization – net value of tangible

asset – value of unidentifiable intangible asset (goodwill)

Now,

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:

  • One should check the comparability of the IP under the transaction and IP for which valuation needs to be done in terms of features, application/ usage of the IP etc
  • The rights the buyer obtained from the IP transaction and the right the seller keeps on the IP
  • The market condition at the time of IP sale, one should adjust the transaction value with the any special ups and downs happening in the market, particularly with respect to the related industry, at the time of deal
  • Whether any other IP or tangible asset included in the deal

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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