What Are the Three Intellectual Property Valuation Methodologies?

What Are the Three Intellectual Property Valuation Methodologies?
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Intellectual property (IP) may seem modest but when it comes to value there are different intellectual property valuation methodologies you can utilize to determine worth. IP consists of many things including company name, slogans, logos, telephone numbers, plans, documents, process, and even developed and proven ideas.

Some organizations, both large and small, often have new employees sign IP confidentiality statements to ensure employees won’t divulge IP information to competitors or use IP for their own gain.

Imagine if the McDonald’s Corporation was sold—you can bet they’d want to receive something for those golden arches and the Ronald McDonald character—because everyone associates these two things with McDonald’s.

Nike wouldn’t like selling the company and not being compensated for their “Just Do It” slogan nor would a well-known business using an easy-to-remember telephone number like 1-800-lawforhire wish to simply sell the business and forget such an important intangible asset.

Is it Really IP?

Kelvin King of the World Intellectual Property Organization says in his article, “The Value of Intellectual Property, Intangible Assets and Goodwill,” to value intellectual property, one must consider the following:

“What are the IPRs [intellectual property rights] used in the business? What is their value (and hence level of risk)? Who owns them (could I sue or could someone sue me)? How may it be better exploited (e.g. licensing in or out of technology)? At what level do I need to insure the IPR risk?”

Further, because the most popular way to price an asset is to utilize actual market values, it becomes difficult to compare market values for some IPs such as a process or method—unless of course the items have a patent, trademark or a copyright—in these cases, the cost to buy the copyright or trademark can be considered. But what about other intangibles?


A design is an IP asset

Because IP varies by type, there are three basic methods a business can utilize to value intellectual property including:

Market Based Value – When using this intellectual property valuation methodology, one needs to find a market comparable, which can be difficult for some IP assets—but not all of them. A telephone number used in a business for, say, ten years can use the market-based value. For example, if a new buyer of a business wants to utilize the same telephone number everyone remembers, the seller of the business can look at the costs to obtain and maintain the number and multiply it by the number of years it’s been in use and thus, determine a set value—the same would hold true for a website.

Cost Based - As stated above, this method is best utilized for a patented, copyrighted or trademarked asset. A business or organization can place a market value on the cost to copyright the asset as well as the costs to develop the asset. An example here could be the Nike slogan—how much did it cost for an advertising company to come up with the slogan and how much did it cost Nike to trademark or copyright the slogan?

Past and Future Economic Growth – IP ideas or processes can be valued best by using this valuation methodology. Let’s take a car windshield wiper as our example. The intermittent windshield wiper was designed by Dr. Robert Kearns and portrayed in the film Flash of Genius; it is one example where we can use the economic growth methodology easily. The design was indeed that of Dr. Kearns (1964) and although the idea was improved upon from the original 1902 design by Mary Anderson who patented the idea, with the ability for the wiper to offer intermittent use, it was shown the idea can be improved upon. Using this method, one can determine the value based on popularity and consumer sales statistics before selling the design.

IP Ethics

Beyond learning how to value intellectual property, there are the ethics behind those who have stolen ideas. In the case of Dr. Kearns and his intermittent wiper, both Ford Motor Company and the Chrysler Corporation used the design without paying for it and Kearns lawsuits were first filed in 1978 but not settled until 1990 and 1995 with Ford paying $10.2 million and Chrysler paying $18.7 million—plus interest.

Not utilizing adequate valuation methodologies can lead to lawsuits, debates, or long mediation and arbitration sessions; where the only winners are not the inventors or possessors of the IPs but the attorneys representing their interests.

Before buying or selling IP, if you can’t determine the value of these intangible assets, often a certified public accountant (CPA) or business appraiser will be able to help you configure a value instead of trying to go it alone.


King, Kelvin, World Intellectual Property Organization – The Value of Intellectual Property, Intangible Assets and Goodwill retrieved at https://www.wipo.int/sme/en/documents/value_ip_intangible_assets.htm

Barry, Keith (2008) Autopia – Greg Kinnear + Windshield Wiper = Oscar?” retrieved at https://www.wired.com/autopia/2008/09/take-your-date/

Los Angeles Times (2005) “Robert Kearns, 77; Invented Intermittent Windshield Wiper Dies” retrieved at https://articles.latimes.com/2005/feb/26/local/me-kearns26

Image Credits:

Pink Telephone - Sxc.hu/linder6580

Windshield Wipers - MorgueFile/cohdra