Market Approach Valuation Methods
The Intellectual Property Valuation process usually involves an attempt to apply the market (sometime called sales comparison) approach. This is because the market – that is, the economic environment where arm’s length transactions occur between unrelated parties – is usually the best indicator of the value of an intellectual property.
The valuer will analyze the market for both sales and license transaction.
The process used to apply the market approach to the appraisal of intellectual properties may be summarized as follows:
▪ Research the appropriate market for information on sales transactions, listings, and the offers to purchase or license comparable intellectual properties. Comparability is judged in relation to factors such as intellectual properties type, intellectual property use, industry in which the intellectual functions and the date of the sale and/or license.
▪ Verity the information by confirming that the market data obtained is factually accurate and that the sales or license transaction reflect arm’s length market consideration. The verification procedure may also elicit additional information about the current market conditions of the sales and/or license of the subject intellectual property.
▪ Select relevant units of comparison (e.g. income multipliers or dollar per unit) and develop a comparative valuation pricing analysis for each units of comparison.
▪ Compare guideline intellectual property sales and/or license transaction whit the subject intellectual property, using the elements of comparison, and adjust the price of the each guideline transaction appropriately to the subject property. If such an adjustment is not possible, eliminate the transaction as a guideline.
▪ Reconcile the various value indications into a single value indication or range of value.
There are ten basic elements of comparison generally considered in selecting and analyzing guideline intellectual property sales and/or license transactions. These element are summarized below whit a more details checklist provided in exhibit II:
The specific legal rights of intellectual property ownership conveyed in the guideline transactions;
The existence of any special financing terms or other arrangement;
Whether the element of arm’s length sale and/or license conditions existed;
The economic conditions that existed in the appropriate secondary market at the time of the sale and/or license transaction;
The industry in which the guideline in intellectual property was or will be used
the physical characteristic of the guideline properties, compared whit the subject intellectual property;
The functional characteristic of the guideline properties, compared whit the subject intellectual property;
The technological characteristics of the guideline properties, compared whit the subject intellectual property;
The economic characteristic of the guideline properties, compared whit the subject intellectual property;
The inclusion of other nonintellectual properties in the guideline; this may include the sale of a bundle or the portfolio of assets, whit could include tangible personal property and/or real estate, as well as intellectual properties.
The last phase of the market approach valuation analysis is the reconciliation. In this step, two or more value indications that have been derived from the guideline sales and/or license market data must be synthesized into an overall value estimate. In the reconciliation, the valuer summarizes and review the empirical data, the valuation analysis, and the result of each of the value indications. These value indications are the resolved into a range of value of a single value indications. The valuer consider the strength and weakness of each guideline value indication derived and examines the reliability and appropriateness of the market data compiled an of a analytical techniques applied.
The Intellectual Property Valuation process usually involves an attempt to apply the market (sometime called sales comparison) approach. This is because the market – that is, the economic environment where arm’s length transactions occur between unrelated parties – is usually the best indicator of the value of an intellectual property.
The valuer will analyze the market for both sales and license transaction.
The process used to apply the market approach to the appraisal of intellectual properties may be summarized as follows:
▪ Research the appropriate market for information on sales transactions, listings, and the offers to purchase or license comparable intellectual properties. Comparability is judged in relation to factors such as intellectual properties type, intellectual property use, industry in which the intellectual functions and the date of the sale and/or license.
▪ Verity the information by confirming that the market data obtained is factually accurate and that the sales or license transaction reflect arm’s length market consideration. The verification procedure may also elicit additional information about the current market conditions of the sales and/or license of the subject intellectual property.
▪ Select relevant units of comparison (e.g. income multipliers or dollar per unit) and develop a comparative valuation pricing analysis for each units of comparison.
▪ Compare guideline intellectual property sales and/or license transaction whit the subject intellectual property, using the elements of comparison, and adjust the price of the each guideline transaction appropriately to the subject property. If such an adjustment is not possible, eliminate the transaction as a guideline.
▪ Reconcile the various value indications into a single value indication or range of value.
There are ten basic elements of comparison generally considered in selecting and analyzing guideline intellectual property sales and/or license transactions. These element are summarized below whit a more details checklist provided in exhibit II:
The specific legal rights of intellectual property ownership conveyed in the guideline transactions;
The existence of any special financing terms or other arrangement;
Whether the element of arm’s length sale and/or license conditions existed;
The economic conditions that existed in the appropriate secondary market at the time of the sale and/or license transaction;
The industry in which the guideline in intellectual property was or will be used
the physical characteristic of the guideline properties, compared whit the subject intellectual property;
The functional characteristic of the guideline properties, compared whit the subject intellectual property;
The technological characteristics of the guideline properties, compared whit the subject intellectual property;
The economic characteristic of the guideline properties, compared whit the subject intellectual property;
The inclusion of other nonintellectual properties in the guideline; this may include the sale of a bundle or the portfolio of assets, whit could include tangible personal property and/or real estate, as well as intellectual properties.
The last phase of the market approach valuation analysis is the reconciliation. In this step, two or more value indications that have been derived from the guideline sales and/or license market data must be synthesized into an overall value estimate. In the reconciliation, the valuer summarizes and review the empirical data, the valuation analysis, and the result of each of the value indications. These value indications are the resolved into a range of value of a single value indications. The valuer consider the strength and weakness of each guideline value indication derived and examines the reliability and appropriateness of the market data compiled an of a analytical techniques applied.
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