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Determining the Value of Your Intellectual Property

In developed countries around the world, there is an ever-growing shift toward the knowledge economy, or industries based on innovation and intangible assets. Intangible assets now comprise the large majority of total assets amongst large, publicly traded companies, and this proportion continues to increase.

In such a climate, businesses that base their operations on intangible assets and innovation are more likely to thrive. Intellectual property valuation can help you determine the true value of your business and take advantage of assets that might currently be unaccounted for or underutilized.

When might intellectual property valuation be useful?

Conducting a valuation of your intellectual property can be to your benefit in multiple contexts. Assessing the value of your patent, trademark or copyright may simplify the licensing or assignment process and help you determine appropriate royalty rates to charge for the use of your intellectual property assets by others. Further, ascribing a reasonable valuation to your intellectual property, if not currently accounted for, may increase the book value of your business, and provide you with greater financing opportunities. For newer businesses, possessing or applying for formal intellectual property rights correlates with a greater amount of outside investment – an informed valuation of these assets can help you communicate that value to investors.

See more statistics on the value and importance of intellectual property

Below are further examples of contexts in which a need for intellectual property valuation might arise.

Purchase or sale of IP assets, both standalone and through M&A: IP valuation can play an important role in negotiations regarding the purchase price of both individual assets and entire business entities. In the latter scenario, valuation of IP assets not captured on the target’s accounting statements may be critical to arriving at an informed purchase price, and obtaining such assets might be the reason for the transaction in the first place. Valuation of IP assets obtained through standalone purchases or business combinations may also be necessary for financial reporting purposes.

Licensing: IP valuation can also form the basis for negotiations in a licensing context – valuation methods may be used to help determine an appropriate royalty rate or assess whether a rate obtained through other means is appropriate. Licensing royalties can be a significant profit driver, as they are often generated at minimal cost to the asset holder. For further discussion of this topic, please see our article on intellectual property monetization.

Asset-backed financing or securitization: IP assets may be used to secure debt financing by pledging the asset in question as collateral. Alternatively, if there is a stable revenue stream associated with the asset, for example, future royalty payments, that revenue stream may be securitized and sold in exchange for immediate financing.

IP litigation: Valuation may be necessary at multiple stages of the dispute process – valuation of the assets in issue may help a party decide whether to engage in litigation in the first place; further, where a court finds infringement, valuation principles may also be used to calculate a damages award.

Bankruptcy and liquidation: Bankruptcy or liquidation scenarios can precipitate asset sales that require valuation. Valuation may also be utilized to conduct a solvency or insolvency analysis.

Compliance: IP valuation may be conducted for regulatory or other compliance reasons, for example, for financial accounting or tax planning purposes. An interesting tax example relating to valuation of intangible property is a recently concluded dispute between managers of Michael Jackson’s estate and the IRS as to the amount of money the estate owed the government. Key to this determination was the value of Michael Jackson’s brand. The IRS considered that Jackson’s brand and reputation were worth $160 million. Fortunately for the estate, the court disagreed and found that the value of Jackson’s IP needed to be assessed at the time of his passing and, at that time, that value was much lower due to, for example, accusations of child abuse. The court ascribed a value of $4 million to Jackson’s name and likeness. To arrive at this value, the court gave primary consideration to licensing agreements which were concluded on Jackson’s behalf and the revenues generated from these agreements.

Internal decision-making and portfolio management: Lastly, various valuation methods may also be used to assist with internal management and investment decisions, including decisions regarding the use, sale, abandonment, development, or maintenance of a business’s IP assets.


In its intellectual property valuation module, the World Intellectual Property Organization (WIPO) sets out several prerequisites for valuing an IP asset. According to WIPO, the asset should meet several conditions, including:

  • It must be separately identifiable (subject to specific identification and with a recognizable description);
  • There should be tangible evidence of its existence (e.g., a contract, registration document, etc.); and
  • It should have been created at an identifiable point in time.

In addition to prerequisites governing the assets to be valued, regardless of the method of valuation eventually selected, substantial information about the IP assets will be required as well as information relating to the relevant market, the economy, etc. This information can be compiled by conducting an IP audit supplemented by additional research. An IP audit refers to a detailed review of a company’s IP assets. In addition to providing the information and background needed for valuation, an IP audit may benefit a company at any point by helping it keep track of its assets and identify any assets which may have become obsolete (in which case, the company may choose to save costs by no longer maintaining the asset). An IP audit may also identify areas of opportunity for example IP assets which might be strong candidates for monetization via licensing, or IP assets which have not been and should be registered. Knowing your IP also ensures that it is being exploited to its maximum potential and helps avoid missed deadlines in respect of its maintenance.

The difference between quantitative and qualitative valuations

The overarching principle guiding intellectual property valuation is how much of a competitive advantage over others in the industry your intellectual property provides. Although this question can be addressed from many perspectives, valuation methods are generally divided into two broad categories.

Quantitative valuation relies on measurable data or numerical information to produce an estimate of the value of your assets. It attempts to answer the question by ascribing a monetary value to the contribution made by intellectual property to your business, whether that contribution is made directly to the business or indirectly by increasing the value of other parts of the operation or appeal to investors. Sample metrics can include similar market transactions, the cost incurred to obtain the asset in question and the cost to replace the gains made by the asset in question with another method.

These two types of valuation methods should not be treated as mutually exclusive; depending on the needs of your business, you may employ a combination of both. Quantitative and qualitative methods tackle the question of asset value from different viewpoints – either or both may be useful depending on the reasons for performing the valuation and the valuation’s intended recipients and users.

Quantitative Methods

Quantitative valuation methods can themselves be grouped into four broad categories: cost-based, market-based, income-based, and options-based. Each is described in further detail below.


  • Two methods: reproduction cost (measures the cost of creating an identical asset) and replacement cost (measures the cost of creating an asset with the same utility)
  • Maintains that a link exists between the costs incurred to generate an IP asset and the asset’s actual value
  • Traditionally involves calculating all expenses incurred in obtaining IP (fees, legal services, human resources) and adjusting for inflation
  • Primarily employed to value intangible assets that (a) are non-proprietary or relatively easy to duplicate or design around; (b) are not associated with income generation or (c) are otherwise difficult, if not impossible to attach a monetary value to
  • Does not factor in risk or future cash flow associated with the IP asset
  • Arguably the easiest and most “objective” quantitative method to apply, since it is based on historical costs rather than future projections
  • Generally inappropriate for valuing IP associated with a product that is already being marketed commercially, as such IP would likely be associated with some form of revenue stream
  • Similarly inappropriate for assignment transactions where the purchaser’s primary concern is the possibility or likelihood of the asset generating income and/or the period over which such income might be generated


  • Utilizes market transactions involving IP assets that are comparable to the assets under consideration
  • Intent is to ascribe a reliable asset value based on an active market of buyers and sellers
  • Attempts to determine a fair market value of the IP based on what people are paying and have paid in similar circumstances
  • In reality, use of market-based methods is often limited by a lack of relevant, publicly available transaction data – to the extent that comparable transactions exist, most will be private transactions performed under non-disclosure agreements
  • IP is often sold as part of a larger transaction, thus, even where a purchase price is available, the fraction of that price that was attributed to IP is rarely available
  • Challenge involved in identifying a comparable asset for this analysis – given the uniqueness of IP assets generally


  • Attempts to calculate the present value of future income to the firm as a result of the IP asset
  • Typically involves discounting expected future cash flows or income associated with the IP asset to the present point in time and adjusting the future cash flows to factor in investments made in the asset
  • Can be hindered by the need to separate income generated purely by the IP asset from income generated by the company or product at large
  • Determining an appropriate discount rate and the need for other assumptions can complicate present value calculations and introduce a high degree of subjectivity, which may be a sticking point in transaction contexts
  • Regardless, still the most employed valuation methods in transaction contexts as well as in most other contexts
  • Considered the most scientific method for IP valuation
  • Other methods under this umbrella include the excess profits method, which compares the profits of a company that holds the asset in question to those of a company that does not, and the relief-from-royalty method, which considers the present value of future royalty payments that could be avoided by owning the asset in question


  • Uses financial options-pricing methodology to value IP
  • Considers expected future income or cash flows but also attempts to account for the uncertainty associated with developing an exploitable IP asset
  • Methods factor in multiple possible outcomes to arrive at a present value that reflects future uncertainty
  • May be particularly useful for valuing IP assets relating to early-stage technology that is still subject to future development and commercialization decisions
  • Examples include the Monte Carlo method, which provides a distribution of net present values based on the weighting of key assumptions, and real options methods, which typically consider inputs analogous to those used in the valuation of financial options

Other, less commonly used methods of quantitative valuation encompass elements of the larger umbrella methods described above but may focus on obtaining metrics that are specific to assets or scenarios. For example, the brand value equation method calculates an overall brand value based on the values of a core trademark and other intangible assets associated with that mark. Alternatively, a liquidation value approach may be used to determine the low-end of an IP asset’s current value in a situation of distress. Depending on the purpose of your prospective IP valuation and the asset in question, one or more of these methods may be helpful.

Finally, although all of the above approaches aim to produce a monetary value, no single method completely encompasses all variables that can factor into a valuation.

Qualitative Methods

Qualitative methods do not always lend themselves to classification as well as quantitative methods do. Nonetheless, the following are two different approaches:


  • Multi-parameter scoring systems used to ascribe a score to the IP asset under consideration; depend on non-quantifiable factors
  • Several scoring rubrics measure strategy, technological advancement and brand strength and evaluate the risks and opportunities associated with the asset
  • Can also be used to assign an IP asset to a category reflecting its primary purpose, e.g., licensing or direct exploitation of a high value monopoly

Value indicators based

  • Based on collection of IP-related information and analysis of that information via statistical methodology
  • Allows for internal comparisons to be drawn based on analysis of various indicators; for example, indicators for patents may include the number of forward and reverse citations, the remaining life of the patent and/or the number of dependent and independent claims

Because of their largely non-monetary nature, qualitative methods are often used for internal and/or strategic purposes. They can be used to estimate the utility of an IP portfolio, evaluate opportunities and risks, and develop an overall strategy for your business. Qualitative methods are also often based on common-sense indicators, which makes them viable for presentations to non-expert audiences and audiences without a strong quantitative background.

Which method is best for me?

The optimal method for you depends on the purpose of your valuation. Whether your valuation is intended for internal or external purposes, the audience to which the results will be presented, and the scope of the valuation are all important factors to consider.

Before selecting a method, ask three main questions:

  1. What is the purpose of the valuation?
  2. What assets will be the subject of the valuation?
  3. For whom is the valuation being prepared?

Once you have established answers to these questions, you can focus on selecting the valuation methods. It may be beneficial to select more than one method of valuation to ensure that the results are corroborated and, if necessary, that both quantitative and qualitative measures are provided.

Multiple authors have suggested analytical frameworks to help select a valuation method. For example, Flignor and Orozco present a pyramid model involving four levels of considerations that culminate in a final deliverable. Other models, such as that described in a 2010 study by Lagrost et al., utilize a different framework but consider similar factors, including the purpose of the valuation as well as the intended audience and that audience’s financial competency.

Note that the level of rigour required for a particular valuation depends heavily on context and purpose. Where a valuation is more likely to be challenged – for example, when performing a valuation to determine a transaction price or calculate a damages award – greater involvement and assistance from outside experts may be necessary. At the other extreme, qualitative valuations performed in-house may suffice for select internal management and investment decisions.


Determining the value of intellectual property can be a challenging process. Nonetheless, obtaining an informed valuation can provide significant benefit to your business. Breaking down the process into discrete steps and establishing a clear purpose and audience for the valuation may help make valuation manageable. It may also be worth consulting outside experts in higher stakes scenarios.

In any event, an accurate estimate of the worth of your intellectual property can guide your business decisions and help you determine an appropriate course of action. If that course of action is monetization, then please see our resource on how to monetize intellectual property.