Valuation of intellectual property is always tricky. There are three basic approaches: cost, market, and income.
Cost: This method values the IP at the cost of obtaining or reproducing it. It is easy to see why this method is awkward to apply in many cases if you consider the complexity and duration of the process that creates a brand such as Colgate or Ferrari. Determining what costs to include – advertising, product development, sales, etc. – and over what period of time can seem arbitrary and ultimately may arrive at a value that is absurdly high or absurdly low. Think of the large cost incurred by Ford Motor Company to develop the former Edsel brand, now arguably valueless, or the minimal expense for canvas, paint, and brushes used by Picasso to create the paintings (such as Les femmes d’Alger, Version O, reproduced above, which sold for $179 million at auction in May) that made his name a household word.
Market: This method follows the pattern of the real estate valuation process in which comparable assets are found in an active market, adjustments are made for differences between the IP and the comparable assets, and a value results that is, theoretically, what the buyers in that market would pay for the IP asset based on their past behavior. In many cases, IP assets such as paintings or famous brands do not trade in active markets so the process of developing comparable sales is dubious at best.
Income: This method asks the question, “how much financial benefit is likely to be generated for the owner of the IP asset?” Usually the answer is based on a history of income attached to the asset, such as a royalty stream from sales of a book or the income produced by a pharmaceutical under patent, projected out over the life of the copyright or patent. While commonly used, this method requires a lot of knowledge to accurately project the flow of money in the future.
As a result of the difficulties that exist with all of these methods, valuations of IP by different people in different contexts are subject to wide fluctuation. In the Delaware bankruptcy court proceedings that were initiated by Radio Shack, the bankrupt company’s brand plus some data on about 67 million customers was sold in an auction to a hedge fund for $26.2 million which sounds like a lot for a name that the consumer market has judged passé. More recently, the value of the Donald Trump brand has been in the news. Considering income from the brand itself and related licensing deals and branded developments, Forbes magazine valued it at about $253 million. Trump himself values his brand at greater than $3 billion.
Ultimately, the science of valuing IP, as can be seen from the evidence, should be approached with an understanding that it also involves at least some of the elements of an art.
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