Hi, I’m Chris Walton, author of this guide and CEO of Eton Venture Services.
I’ve spent much of my career working as a corporate transactional lawyer at Gunderson Dettmer, becoming an expert in tax law & venture financing. Since starting Eton, I’ve completed thousands of business valuations for companies of all sizes.
Read my full bio here.
Valuing something tangible, like a house or a piece of machinery, is difficult enough. But valuing something intangible like an idea, a brand, or a license?
That’s a process filled with nuanced and complex methodologies. It’s also something you can’t afford to get wrong.
Otherwise you risk investing in the wrong opportunities, missing out on great ones, or making poor choices with companies already in your portfolio.
That’s why 10 times out of 10, Intellectual Property (IP) valuation is best left to professional valuators like Eton who eliminate risk and ensure the valuation is done efficiently and accurately, every time.
But that doesn’t mean you shouldn’t understand the process we follow.
To help, I’ve written this article where I explain the importance of IP valuations, outline the methodologies commonly applied, provide a checklist of key considerations when valuing IP, and walk you step by step through the process.
Key Takeaways:
Intellectual property valuation is the process of determining the monetary value of intellectual properties and can be done in isolation or as part of a broader company valuation process.
Intellectual property can include:
Companies can buy and sell intellectual property in the same way they would a physical asset, making their accurate valuation an important aspect of business and investment strategy.
For many tech and knowledge-based businesses, the value of their intellectual property is much greater than any physical assets they own.
Apple, for example, has successfully built their brand name over decades. In 2023, the Apple name was worth approximately 880.5 billion U.S. dollars—a number that falls 7% lower than its 2022 high of 947 billion dollars.
But why should a business, Apple or otherwise, value their intellectual property?
IP valuation is important for these 8 key areas:
Understanding the value of IP helps businesses make informed decisions about where to invest their resources, how to prioritize research and development (R&D) efforts, and which technologies or brands to develop further.
Publicly traded companies are often required by regulatory bodies to report the value of their intangible assets accurately.
This helps in providing transparency to shareholders and other stakeholders about the company’s true worth, beyond just its physical assets.
During mergers or acquisitions, the value of IP assets is critical in negotiating fair prices.
Buyers and sellers need to know the worth of patents, trademarks, copyrights, and other IP rights involved in the transaction to ensure proper valuation of the overall business.
For startups and businesses seeking investment, IP can be a significant part of their valuation.
Demonstrating that their IP has substantial value can attract venture capital and other forms of investment, and can be used as collateral for loans.
When companies license out their technologies or franchise their business model, the price of licenses and franchise fees can be determined based on the valuation of the underlying IP.
This helps in setting fair and profitable contract terms.
In legal disputes involving IP, such as infringement cases, the financial value assigned to the IP can determine the amount of damages awarded.
Accurate valuation is crucial for both plaintiffs and defendants to ensure fair outcomes.
Companies need to value their IP accurately for tax purposes, particularly when transferring IP between divisions in different countries.
Transfer pricing must be based on the arm’s length principle, requiring reliable IP valuations to comply with international tax laws.
IP assets can also be insured, and their valuation is necessary to determine appropriate insurance coverage to protect against potential losses due to infringement, theft, or other risks.
Investors or third-party valuators use five main methods for IP valuation:
Each method is distinct and chosen based on the investment strategy, IP type, and development stage of the company.
Let’s look at each in more detail.
The Income Approach values IP based on the net economic benefit (cash flows) it is expected to generate over its useful life.
Best for:
This method is best for IP that has a clear and direct impact on revenue generation, such as a patented product currently on the market.
Variables needed:
Risk factors when applying method:
Assumes future cash flows are predictable; sensitive to changes in economic conditions affecting revenue projections.
Advantages:
Directly ties IP value to its economic contribution; easy to understand and communicate.
Drawbacks:
Requires detailed financial forecasts and is sensitive to the chosen discount rate.
The Discounted Cash Flow method is a specific application of the income approach that forecasts the future cash flows from the IP and discounts them to a present value using a risk-adjusted discount rate.
Best for:
Patents and technologies with predictable, long-term revenue streams.
Variables needed:
Risk factors when applying method:
Highly sensitive to the accuracy of cash flow forecasts and discount rate; may not be suitable for new or unproven IP.
Advantages:
Provides a detailed, quantitative valuation; widely accepted and understood in financial and business communities.
Drawbacks:
Relies heavily on accurate financial projections; can be overly optimistic if future risks are underestimated.
The Venture Capital method estimates the future resale value of a company or its IP and discounts it to the present using an expected high rate of return demanded by venture capitalists.
Best for:
Early-stage companies where IP is a major element of value but future incomes are uncertain.
Variables needed:
Risk factors when applying method:
Depends heavily on speculative future growth and market conditions at the time of exit.
Advantages:
Useful for high-growth potential startups where traditional cash flow methods are not feasible.
Drawbacks:
Highly speculative; heavily dependent on the exit scenario and market conditions.
The Relief from Royalty Method values IP by estimating the royalties that would be saved by owning the IP instead of licensing it.
Best for:
Evaluating trademarks, software, or patented technology that could be licensed in the market.
Variables needed:
Risk factors when applying method:
Depends on the availability and comparability of market royalty rates; assumes stable market conditions.
Advantages:
Relatively straightforward if comparable royalty data is available; links IP value to market conditions.
Drawbacks:
Requires accurate comparable market data; may not account for unique features of the IP that differentiate it from standard licensing agreements.
The Real Options Method treats investment in IP as an option, giving the owner the right but not the obligation to pursue further development or commercialization.
Best for:
Best for IP with high uncertainty and significant potential for variability in future value, such as pharmaceutical patents or emerging technologies.
Variables needed:
Risk factors when applying method:
Complex to model and understand; requires deep knowledge of option pricing and market dynamics.
Advantages:
Captures the value of flexibility and strategic decisions in uncertain environments; can highlight additional strategic value not evident in other methods.
Drawbacks:
Complexity and the need for advanced quantitative skills; potential for overvaluing IP due to optimistic assumptions about future options.
| Pros | Cons | |
|---|---|---|
| Income Approach: | - Directly links IP value to economic contribution. - Easy to understand and communicate. | - Requires detailed financial forecasts. - Sensitive to changes in discount rate and economic conditions. |
| Discounted Cash Flow (DCF) Method | - Provides a detailed, quantitative valuation. - Widely accepted and understood. | - Relies heavily on accurate cash flow projections. - Can be optimistic if risks are underestimated. |
| Venture Capital Method: | - Useful for high-growth potential startups. - Captures value where traditional methods aren't feasible. | - Highly speculative and dependent on future growth and market conditions. - Relies on exit scenario assumptions. |
| Relief from Royalty Method: | - Straightforward if comparable data is available. - Links IP value to real market conditions. | - Requires accurate comparable market data. - May not reflect unique IP features. |
| Real Options Method: | - Captures the value of flexibility in decisions. - Highlights strategic value in uncertain environments. | - Complex and requires advanced quantitative skills. - Potential for overvaluing IP due to optimistic future options. |
What method works best is dependent on several factors:
If you don’t have prior investment or valuation experience, we recommend you work with a third-party valuation partner.
They will take into account all the important factors to choose the right valuation method that fits your situation.
If you need expert advice or a valuator to take you through the process, please get in touch with me here.
Below you will find a list of 10 key considerations to take when valuing intellectual property and a checklist to help you action them.
1. IP Type
🔲 Determine the type of IP (e.g., patent, trademark, copyright, trade secret).
🔲 Understand the legal protections and limitations associated with the IP type.
2. Purpose of the Valuation
🔲 Identify the reason for the IP valuation (e.g., sale, licensing, litigation, financial reporting).
3. Economic and Market Factors
🔲 Analyze current market conditions and trends.
🔲 Consider the IP’s market share and competitive landscape.
🔲 Evaluate market demand for the IP or related products/services.
4. Legal Status and Protection
🔲 Verify the legal standing and enforceability of the IP.
🔲 Check the geographical coverage and remaining duration of protection.
🔲 Assess any pending litigations or disputes related to the IP.
5. Financial Analysis
🔲 Estimate current and future revenue streams attributable to the IP.
🔲 Calculate costs associated with maintaining and defending the IP.
🔲 Project future economic benefits and associated risks.
6. IP Specifics and Usage
🔲 Understand the technological relevance of the IP.
🔲 Review the IP’s history of use and its developmental stage.
🔲 Consider any existing and potential licensing agreements.
7. Valuation Method
🔲 Select an appropriate valuation method based on the type of IP and available data.
🔲 Consider multiple valuation approaches to cross-validate the estimated value.
8. Risk Factors
🔲 Identify risks related to the technology becoming obsolete.
🔲 Consider market entry by competitors and potential technological advancements.
🔲 Evaluate economic and regulatory risks that may impact the IP’s value.
9. Documentation and Support
🔲 Compile all necessary documentation (e.g., patent registrations, financial records).
🔲 Ensure transparent and defensible assumptions in the valuation model.
🔲 Consider consulting with IP valuation experts to enhance accuracy.
10. Strategic Value
🔲 Assess the strategic importance of the IP to the business’s overall goals.
🔲 Evaluate the IP’s role in driving innovation and securing competitive advantage.
🤔Want tailored advice for your IP valuation? 🤔
This article is great for general guidance on the IP valuation process but unfortunately, it can’t be tailored to your unique circumstances. And when it comes to valuation, circumstance determines everything.
If you want personalized advice to help you navigate your IP valuation, get in touch with us here. We can provide advice specific to you over a call.
Otherwise, read on for a general overview of the process.
This is what a typical IP valuation process will look like with a third-party valuation provider:
Time taken: You can choose a provider in as little as 1-2 days.
Consider these factors when looking for a third-party valuation provider:
At Eton, our valuators are Big-4 trained and we take the time to understand the intricacies associated with each engagement, so you’ll get a tailored approach that meets your needs. We also provide on-going audit support whenever you need it.
We usually deliver an Intellectual Property valuation report in 10 days, but we can also do it in as little as 1 day for an extra fee. Whatever timeframe you need, we can work with.
“I have worked with Eton on several other companies, including Notion, Preset, and Convex, across various valuation needs at different companies and have consistently been amazed by their meticulous approach, swift delivery, and cost-effective solutions for all projects. Eton has always gone above and beyond, offering a unique combination of valuation expertise, legal insight, experience liaising with the C-suites and boards of directors, and seamless collaboration with us on any post-valuation questions.”
Time taken: 1-2 days (client side)
Your chosen valuation provider will request financial and company documents to help them complete the valuation.
At Eton, we request:
It’s this stage that causes the most delays to the valuation process because many companies scramble to pull the information together. Delays can incur additional costs so it’s best avoided.
We recommend compiling your documentation ahead of time and keeping it up to date so that whenever you need a valuation, they’re readily available.
Time taken: 1 day (client and valuation firm)
Your valuation date is the specific point in time at which the value of your intellectual property is assessed.
But it’s rarely the date we complete the valuation, which can be confusing. In fact, we often align your valuation date with a convenient financial time such as month or year-end.
The date can impact whether the valuation is compliant, strategic, and accurate.
Here are the factors we consider when choosing a valuation date:
Always approach the selection of a valuation date with a strategic mindset, considering the internal needs of the company and the external regulatory and market environment.
Time taken: 1 day (valuation firm side)
Once your date is decided, you and your valuation firm can apply intellectual property valuation methods.
We listed those methods earlier in this article. Feel free to revisit that section if you need a refresher.
At Eton, we consider all relevant factors to select the most accurate valuation method for your specific situation.
Time taken: Anywhere from 1-7 days (depending on specified turnaround time)
After applying methodologies, your valuation firm will present a draft report, which will include the methods chosen, assumptions made, data pulled, and the fair market value conclusion.
With Eton, our experts are just a call away to discuss details and conclusions—whether that’s what amendments you need us to make, or if we can go ahead with finalization.
Time taken: Anywhere from 1 hr to 1 day depending on revisions (client & valuation firm)
Once revisions are made, your valuation firm will finalize the draft and send it to you for official sign off.
At Eton Venture Services, we understand the complexities and nuances of intellectual property valuation and we are prepared to support you every step of the way.
Our team of financial and legal experts work together to value your company accurately and ensure you get the information you need to make strategic decisions.
We pride ourselves on our attention to detail and customer service, offering after-valuation support and being on call to give advice.
If you need intellectual property valuation services, get in touch with us here.
Have more questions on intellectual property valuation? I answered them below:
Intellectual property (IP) is a critical asset for businesses, offering significant economic value and competitive advantages.
According to the World Intellectual Property Organization (WIPO), IP-intensive industries generate 45% of total economic activity (GDP) in the EU, worth €6.6 trillion.
In the U.S, IP-intensive industries account for over 38% of GDP, emphasizing their role in driving innovation and economic growth.
IP serves as a cornerstone for securing a company’s market position by protecting innovations from competitors and creating barriers to entry.
It also opens up revenue streams through licensing, patents, trademarks, and copyrights, which not only enhance profitability but also attract investments.
For example, patented products tend to have higher return rates, with studies indicating that firms with patents can charge premium prices, leading to a profitability rate that is 3 to 4 times higher than non-patented counterparts.
Moreover, IP helps in establishing brand recognition and loyalty, which are invaluable in saturated markets.
A strong brand, protected by trademarks, can command a significant market share and consumer preference, directly impacting a company’s bottom line.
Overall, intellectual property is not just a legal right but a pivotal business asset that supports growth, stability, and innovation in the competitive global marketplace.
When determining the value of intellectual property (IP), several key factors come into play that you should consider:
These factors help you gauge how valuable your intellectual property might be and guide you in maximizing its potential.
We discussed five key methods to calculate the value of intellectual property in this article. They are:
Schedule a free consultation meeting to discuss your valuation needs.
Chris co-founded Eton Venture Services in 2010 to provide mission-critical valuations to venture-based companies. He works closely with each client’s leadership team, board of directors, internal / external counsel, and independent auditor to develop detailed financial models and create accurate, audit-proof valuations.
