Valuation of Intellectual Property

Intellectual Property as the name suggests refers to creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce.

Now from a finance guy .. what kind of artistic and literary things can be expected... you are being too quick to judge ...

The scope of this asset( OMG, i beg your pardon... yes, an asset) usage and its manifold benefits are pushing the envelope further in the Asset Valuation Industry. Till lately, considered as an asset of undetermined value, it has suddenly gone to become one of important sources of Fund Raisimg and Valuation.
A key driver in consideration of :-
(1) Mergers & Acquisitions.
(2) Licensing & Assignment.
(3)Investment
(4)Enforcement
(5)Portfolio Investent & Management.

The scope encompassing this industry has been expanding bringing under its wake,right from bringing finance professionals from different walks to sourcing legal expertise in different capacities. The size of this industry going forward is estimated to be in hundreds of billion dollars.
The crux of the industry was formed, when people answered the question of
"Why to Value IP?."
To take a leaf from Prof. Drucker, "The value of the Invisible is more than the Visible."Enumerated below are the valuation methods we follow:

The cost method of valuating IP basically focusses on two of the criterias, Replacement Method and Reproduction Method.This valuation model either calculates value in terms of replacement or reproduction cost of the IP.The most important aspect in this method is that the valuation here is done at current and not at historic cost.For eg. A Pharma company which has been developing a molecule for the last 10 years would consider the cost incurred on the current date and not on the basis of last 10 years cost of inputs.
This method is used usually to value an asset at an early stage of development.

The next method is Market Value Approach method.This valuation is done by ascertaining the exchange value of an similar asset in the same industry.However, the difficulty of obtaining the transactional data poses a major challenge infron of the valuer.
Moreover, every asset of intangibe nature is unique and so does the valuation.This method is more prevalent in companies where there are a lot of substitutes available in the market, since the comparisons should be an "apples to apples comparison" and the industry per se has to be transperant in sharing its transactional data.

The next method in this industry is the Income Approach to Valuation. This considers the future income which can accrue from the asset in future.
It calculates (projections) the future earnings capacity of the IP(Intelletual Property), and its estimated years of life as per the patent filing.

The other method is one of the most prevalent and most talked about method in the valuation space, Discounted Cash Flow (DCF) method.

The other methods are :-
(1) Venture Capital Method, whose templates of valuation are very wide ranging and varied from the perspective of different Venture Capitalists.
(2) Relief from Royalty Method.
(3) Monte Carlo Simulation Method.
(4) Option Pricing Model Method.

The Intellectual Property derives its value in terms of :
(1)Accounting Value.
(2)Economic Value.
(3)Technical Value.

The IP Valuation Industry opens up a huge scope in another unexplore vertical, Securitization, which is presently ... crores. An Industry waiting to explode as far as emerging markets like India are concerned...