Traditional Intangible Assets Valuation Techniques
Traditional Intangible Assets Valuation Techniques
An excerpt from Chapter 4 of The Intangible Assets Handbook
By Weston Anson

Traditionally, the methods used to value intangibles have some elements in common with
those used to value tangible assets such as real estate. An important difference in most
cases, though, is in the availability of the necessary data, such as finding comparable
transactions or relevant historical financial information. Often, comparable transactions
or benchmark information needed to establish a logical and intellectually sound basis for
the valuation conclusions of intangible assets are unavailable.
In the last two decades, the intangible asset valuation practice field has grown
dramatically. Traditionally, four different methodologies have been used to value assets,
whether for transaction, tax or litigation purposes; in a going-concern valuation or in
liquidation. We also present herein a fifth method that is frequently used for technology
valuation.
The Cost Approach
The Cost Approach is based on the economic principle of substitution. Essentially, the
premise is that potential buyers will pay no more for an asset than it would cost them to
develop or obtain that same asset or an asset with similar utility in other cases. The Cost
Approach seeks to determine the value of intangible assets by aggregating the costs
involved in their development. On the face of it, this may seem fairly straightforward.
However, there is more involved in the process than simply adding up the receipts for
expenditures associated with the intangibles. Indeed, there are two distinct Cost
Approach methods: Reproduction Cost and Replacement Cost.
“Reproduction Cost” measures the level of expenditures necessary to reproduce the exact
same asset. It is appropriate in situations such as litigation involving specific patents or
when return on investment needs to be measured. Alternatively, the “Replacement Cost”
method measures the expenditures necessary to develop an asset with similar utility and
is appropriate in situations such as determining a target price prior to negotiations or
calculating a basis for suitable royalty rates or transfer pricing.

costs, should be pro-rated to reflect their true level of involvement with the development
process. Also, when projecting the timetable needed to develop the assets in question,
consideration must be given to the probability of success. Another aspect to remember is
the fact that not all expenditures contribute equal value to an intangible asset. For
example, it is doubtful that expenditures on Super Bowl ads increased the value of the
trademarks and other marketing assets of the brands being advertised anywhere close to
the tens of millions of dollars that are spent each year.
Opportunity costs consist of value of the other courses of action and investment
opportunities that have been passed on, to pursue the development of the subject assets.
Essentially, this analysis should measure the impact of a delayed market entry. In other
words, what could be earned during the period of development if the assets were licensed
today? Also, whether utilizing the reproduction method or the replacement method in a
current or historical environment, the risk of obsolescence needs to be incorporated into
the analysis.
The Cost Approach is most useful in cases where there is no economic activity to review,
such as early-stage technology that is not yet producing revenue. It also is effective at
establishing a maximum price for the asset if the context is a proposed transaction. This
situation exists when there are many candidates for substitution available. The main
drawback associated with the cost approach is that it does not recognize any economic
benefits associated with marketplace activity. For example, there is no mechanism to
incorporate revenue or profit data, and it therefore ignores important data by which the
value of assets is typically measured. Costs that should be quantified in this analysis
include:

· Legal fees
· Application/registration and other fees
· Personnel costs
· Development costs
· Production costs
· Marketing and advertising costs

markets. This approach is best if an active market exists that can provide several
examples of recent arm’s length transactions and adequate information on their terms and
conditions. However, most intangible assets are not traded frequently enough to be able
to establish a value using market-based comparables. Since most intangible assets are
considered unique by definition, it is also difficult to ensure that a truly comparable
situation exists. Moreover, it is often very difficult to get enough details on the few
available transactions to be certain that all the elements that make for a good comparable
have been revealed.
When the necessary data can be found, the Market Approach has increasingly become the
preferred approach in the valuation of intangible assets. This is because the Market
Approach is practical, logical, and applicable to all types of intangible assets. In contrast
to the other methodologies, the strength of the Market Approach is its reliance on market
sales, rents, and transactions.
In addition to the type of asset, information necessary to establish comparability includes
the relevant industry, geographical constraints, exclusivity, payment mechanisms and
timeframe, among others. It is also important to know if the transaction was related to a
bankruptcy filing, litigation, judgment or other forced transactional divestiture. These
may render the comparable transaction unsuitable for the analysis in the absence of
compensating adjustments as they will reflect forced/artificial values. Also, pay close
attention to the conditions of the market at the time a transaction takes place, as these will
influence the sales or license terms. Along with the possible adjustments listed above, the
price information contained in comparable sale and licensing transactions will frequently
have to be adjusted using a common reference point such as sales, profit margin or net
income.
As with the Income and Relief from Royalty Approaches discussed below, the value
conclusion can be reviewed at any time subsequent to the analysis to see if any
adjustments are necessary. When reliable transaction data are available, the Market
Approach is considered the most direct and systematic approach for determining an
accurate value for intangible assets.
EXHIBIT IV-2

benefits (income or net cash flow) that will accrue to its owner. It requires a projection of
future income, an estimate of the likely duration of the income stream, and an estimate of
the risk associated with generating the projected income stream. The projection of future
income incorporates expected sales of products or services that feature the intangible
assets. Of course, an accurate forecast of revenue depends on understanding the
competitive and economic environment in place during the appropriate timeframe for the
valuation. The length of the forecast is dependent on an accurate estimate of the asset’s
remaining useful life. This will incorporate factors such as potential obsolescence,
historical usage, and expiration of the period of transaction.
The discount rate used in the present value calculations must incorporate the many risks
associated with the generation of the future income. These include the overall market
risk, specific industry risk, and risks associated with the assets and operation being
analyzed. Although it may seem less precise than the cost approach due to the inclusion
of multiple estimates, the information needed to make these estimates can be accurately
developed and verified. Given sufficient data availability, an additional benefit of this
approach is that it provides the ability to perform sensitivity analyses by adjusting the
value parameters, which allows management to better understand the importance of the
various factors driving value in their particular situation.
EXHIBIT IV-3
INCOME APPROACH
Annual Company Revenues $60M
Portion Attributable to IP Portfolio 18%
Years of Future Use 4.5 years
Discount Rate 16.0% .
VALUE = $40.8M

The Relief from Royalty Approach
With this method, the value of the intangible assets is calculated as the present value of
the royalties that the company is relieved from paying as a result of ownership of the
assets. In other words, this approach provides a measure of value by determining the

networks and marketing campaigns will also have an impact. Again, these are all
elements in determining the context in which the assets are utilized and, thus, how their
value should be measured.
An objective analysis of factors such as these will determine if an appropriate royalty rate
is closer to the 5% rate or the 15% rate in our example. Since this method uses royalty
rates that are based on marketplace transactions and uses a forecast of revenue/royalty
income, the Relief from Royalty Approach is often considered to be a combination of the
Income Approach and the Market Approach.
A Note of Caution: In the last decade, The Relief from Royalty Approach has become
misused and abused. Too many valuations are based on theoretical “marketplace royalty
rates.” It is true that some intellectual property, particularly trademarks, patents, brands,
and copyrights, do have comparable market royalty rates that are readily established.
However, for many intangible asset valuations, comparable royalty rates are speculative
at best. Also, there is no such thing as an “exact” comparable royalty rate, and any
valuation project that claims to present exact comparables is flawed in its basic premise.
When appropriate royalty rate comparables and/or calculations are available, however,
the Relief from Royalty Approach is a very effective valuation methodology.
EXHIBIT IV-4
RELIEF FROM ROYALTY APPROACH
Annual Sales $1.0M
Royalty Rate 6.0%
Remaining Life 7 years
Discount Rate 16.5% .
NET PRESENT VALUE = $350,700

The Technology Factor Approach
This is another method, applicable only to technology, which is gaining acceptance. The
Technology Factor Approach is designed to measure the portion of a business unit’s
overall market value that is based on the utilization of the underlying technology. The
willing buyer/willing seller aspect of the fair market value definition is incorporated into

relative contribution to the overall determination of technology value. The mean of these
two averages (utility + competitive) is then taken to arrive at the final Technology Factor.
The resulting Technology Factor is then multiplied by the net present value of the subject
business unit to arrive at the value of the technology. The value of the technology is thus
segregated from the value contributed by other assets of the business.
Because the upper limit is based on the contribution of all intangibles to overall value, it
limits the validity of the Technology Factor Approach when used on any operations that
feature a mix of both technology and other intangibles. Similarly, the presence of several
different technologies in one product can lead to erroneous conclusions when trying to
determine the value of only one of them. The Technology Factor Approach is very
effective, however, when analyzing a technology for licensing, or other situations where
the analyzed technology is the only one found in the subject operation. This is often the
case when reviewing business units.
EXHIBIT IV-5
TECHNOLOGY FACTOR APPROACH
Upper Limit for X Industry: 50
Calculation Formula:
Weight Attribute Score

1 Stage of the Technology +1
2 Capital Required - 2
1 Market Size +2
(Upper limit x (weight x score) ) = attribute factor

50 x (1 x 0.75) = 37.5
50 x (2 x 0) = 0
50 x (1 x 1) = 50
(37.5 + 0 + 50) / 4 = 21.875

In the abbreviated example above, the Technology Factor is calculated to be 21.9. This