It is widely recognised that intangible assets, such as patents and trade marks, can have significant monetary value. However, it can often be difficult to assign a specific value to a particular asset, or indeed to an entire portfolio.
There are many scenarios in which one might wish to determine the value of an intangible asset, for example when entering negotiations over the sale or licensing of a patent, or when trying to value a company. In this article, we review some of the common IP valuation methods and discuss their relative strengths and weaknesses.
A cost-based approach attempts to value an IP asset by estimating the costs that would be required in order to reproduce the asset by developing it from scratch, or to develop a comparable replacement asset, for example by developing a work-around to a patent instead of purchasing the asset. These two approaches are referred to respectively as the reproduction cost method and the replacement cost method. In cases in which the party that is seeking to value a patent was also responsible for creating the invention in the first place, the reproduction cost method could take into account any R&D expenditure that could be attributed to the development of the invention.
One potential drawback of a cost-based valuation method is that by failing to consider potential future benefits which could be derived from the asset, such as licensing fees or additional sales, the valuation may not truly reflect the value of the asset to a potential purchaser. In particular, a cost-based valuation may be of limited use when the potential future value of the asset far outstrips the initial investment that was required to create it in the first place.
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