Setting prices for a company is tricky enough without adding in the intangible things. Intellectual property is valuable and integral to your company’s success – so how do you place a value on it, especially when working with clients on a new project? How do you calculate it? Is there some equation that magically tells you the exact value of your intellectual property?
Here are a few ways you can determine the worth of your intellectual property to your company.
This method finds the value for your IP asset by comparing similar transactions in a similar market for similar assets with similar uses and establishing a market value. However, this is only doable if an active market exists for your particular asset. Since licensing and selling intellectual property assets is relatively new, there are constantly IP assets that won’t be able to use this valuation method.
The context in which the transaction was made is also important and can prevent certain ones from being comparable. However, if you can find enough information, this method is considered the most straightforward and systematic way to determine the value of your IP.
Using a cost-based method creates a one-to-one correlation between the cost to produce and the value of the asset. The value of the asset is no greater than the cost to produce, replace or purchase the asset. This is a good method for things like direct costs of materials, legal fees and time spent in development.
Cost-based methodology is the most convenient, but it fails to take into account the fact that the value of IP is typically higher than the flat amount it costs to produce it.
This method requires the most information and expertise, but it is probably the most widely-used and reliable one. The income-based method is based on the theory that the value of an IP asset is determined by the financial income it can generate in the future. The trickiest part is knowing what income will be directly attributable to the IP asset. It looks at past financial information, market information, industry trends and competition to determine the best estimate of the IP asset’s value.
Knowing the value of your intellectual property assets is important to conducting a successful business. How much is yours worth? Find out using one of these methods.