PTC FORUM: Digests of Articles

USA - INTERNATIONAL / INTELLECTUAL PROPERTY / VALUATION

The Licensing Journal, Volume 22 No 4, April 2002

Valuing Intellectual Property Assets for Licensing Transactions

Mark Berkman

It is becoming increasingly important, not least for licensing purposes, that there should be effective methods by which intellectual property can be valued; and, as the author of this short and helpful article says, "patents or other forms of intellectual property rarely, if ever, have readily observed market prices". He looks at four approaches to the problem of valuation: the rule of thumb, the application of comparable transactions, the full income approach and an income approach constrained with several simplifying assumptions. Taking patent valuation as an example, he says that rules of thumb, such as the 25 per cent rule, do not generally provide serious guidance: they allow neither for the number or value of economic alternatives nor for the value ranges of given patents, which may be "minor improvements, major improvements or revolutionary changes". Comparable transactions are a more reliable guide; but different market conditions may change perceptions of genuine comparability. It follows that the income approach is preferable. This method of valuation takes the present value of the future income streams associated with the product or process less the net profit from the next best alternative product or process. The author illustrates the point with a discounted cash flow analysis. The results are as objective as any such method allows; but the author stresses the continued scope for bargaining in licensing negotiations. Much depends on whether the owner of the patent is also a manufacturer or not; whether the owner invites bids, with a view to accepting the highest bid; and so on. To make the point, the author postulates different scenarios and adds an important caveat about the validity of the patent, since this may strongly influence the negotiations. "The discounted cash flow methodology … provides the framework to establish the bargaining limits between the parties." [20062]