INTERNATIONAL / INTELLECTUAL PROPERTY / VALUATION

A New Method to value Intellectual Property

AIPLA Quarterly Journal, Vol 30 No 3, Summer 2002

Ted Hagelin

In this article, the author's starting-point is the vast and increasing value of intangible assets relative to the value of physical and financial assets. The author distinguishes the intangible assets to which the owner has an enforceable legal right - and this includes intellectual property rights - from intangible "advantages", such as employee training, management skill and customer patronage. He considers in the article the three basic methods of valuation; the methods developed specifically for intellectual property; and the merits of a new valuation method, referred to as Competitive Advantage Calculation (CAV). The three basic methods are the cost method, which measures the value of an asset by the cost of replacing it with an identical or equivalent asset; the market method, in which the valuation of an asset is measured on the basis of comparable transactions between unrelated parties; and the income method, which values an asset according to the net future income stream expected to accrue during the asset's life. The latter method has a number of parameters discussed in detail in the article. As for the methods developed in connection with intellectual property, the article refers to "the 25% rule", which may be a somewhat crude rule of thumb; the industry standards methods, based on a reference to royalty rates in similar past transactions; the ranking method, which compares the intellectual property asset in question to comparable intellectual property assets according to a subjective scale, using panels of experts, or to an objective scale based on measurable past experience; the surrogate method, in the patent field, based on an assessment of the patents themselves, particularly the number of patents issued to a company, payments of patent maintenance fees and prior art citations; disaggregation methods, according to value or income, involving the apportionment of some fraction of total value or income, to intellectual property assets; the Monte Carlo method, which is a refinement of the income method, but assigns a range of values to the variables used in calculating the net present value of an asset; and the options methods, based on a widely used method of valuing stock options. These methods are supplemented in the article by the CAV method (see above), developed by the Technology Transfer Center at Syracuse University: the full name of the method is covered by a trade mark registration. It consists essentially of a novel combination of the income and disaggregation approaches to valuation and is commended by the author, not as a unique solution to the problem of valuing intellectual property assets ("no single valuation method is definitive"), but as a useful addition to decision-making tools available to intellectual property managers. [20077]