Valuing Intellectual Property: Market Approach

To continue our series on the ways to value intellectual property (IP), this third post covers the market approach. Read part one here and part two here.

Under the market approach, appraisers look at sales and licensing agreements of comparable, but unrelated intellectual property. To determine which IP is comparable, an appraiser would look at the description of the sold or licensed IP, its potential to generate income, the date of the sale or licensing agreement, and the IP’s age and remaining useful life. What can sometimes make the market approach to IP valuation difficult is that companies tend to guard the details of IP transactions because IP frequently is what gives one company a competitive advantage over another. To get information about IP transactions, an appraiser may have to conduct an in-depth review of SEC filings or gain access to proprietary transaction databases. 

When using the market approach for IP valuation, it is important that you work with a skilled appraiser who knows about the factors that can skew an IP valuation. For example, in a licensing agreement, the IP transactions may restrict the licensee’s rights to a specific geographic area. Because the licensee’s rights are limited, the market approach can underestimate the value of the IP. Or if one of the sale terms of the chosen comparable transaction is an installment payment, the IP may be overestimated. An experienced appraiser would be aware of these factors and adjust accordingly.

Stay tuned for our next post, which will be on the income approach to valuing IP.

By: Present Value    

Tags: Intellectual Property, IP Valuation, Market Approach

This entry was posted on Thursday, August 13th, 2009 at 6:29 pm and is filed under Appraisal Terms, Intellectual Property. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.