Given this background of the three general methods of valuation, the process of valuation of intellectual assets thus proceeds in several steps:
Step One: Choose An Approach Optimally, an intellectual asset valuation, just like valuation performed when selling a home, should employ each of the three approaches noted above. Data and information constraints, however, often limit the confidence level of each of the approaches. For income approaches, revenue and profit projections can be difficult to obtain, and can be unreliable at times. Projections frequently are generated by product managers and marketing personnel and intentionally show a very rosy picture in order to obtain corporate approval or outside financing. To temper that, one might benchmark against actual sales, profits, and cash flows, before and after negotiation. One could benchmark the technology at issue from a myriad of other technologies, product attributes, and marketplace factors that are impacting the product and process performance. The associated problem is that it’s very difficult to assess a reasonable profit split percentage. Is 25% fair? Is 67% fair? And if 25% is fair, why is 20% not? Additionally, determining the project’s cost of capital can pose problems because establishing comparable investments for the technology at issue is often quite difficult because either true comparables don’t exist, or if they do, the information is frequently confidential.
For market approaches, other observed transfers often are not in fact comparable to the case at hand. Important differences may include: the nature of the underlying technology; the similarity of the precise bundle of intellectual property rights transferred (e.g., combinations of know-how, grant backs, and cross licenses); the comparability of existing and projected marketplace conditions at each point of the licensed negotiation; the relative bargaining strength of the comparable licensing parties; the existence and significance of pending or threatened litigation; and the strength of the underlying intellectual asset associated with findings of validity, enforceability, infringement. Nonetheless, a wide range of transactions in a narrow range of prices may provide a very powerful benchmark.
Cost approaches should also be used with care. Avoiding costs can represent a floor in measuring value. An examination of the direct R&D expenditures that were avoided often does not properly account for all R&D. A large portion of R&D projects ultimately bear no fruit, yet the R&D process is in part intended to identify and eliminate blind alleys. In only focusing on successful R&D, one might be ignoring the cost of many other unfruitful projects that the technology user is able to avoid. The alternative design might not provide the same utility or might result in costly development delays, both of which would need to be assessed appropriately and would suggest that the avoided costs alone may undervalue the property at issue. Nonetheless the advantage of the cost approach is that it can be reasonably easy to implement.