Intellectual Property Value Evaluation Methods

December 12, 2009
Harakenzo World Patent&Trademark
Patent attorney Teru Yamamoto

1. Introduction
In recent years, the need for the evaluation of the value of intellectual property (intellectual property rights) such as patent and trademark rights is growing. In this column, I would like to overview basic concepts for the evaluation methods of the value of intellectual property.

2. Basic Strategies for Evaluation of Value of Intellectual Property
Approaches to the evaluation of intellectual property currently used are the same approaches used to evaluate asset values of estates, etc., or evaluation of corporate values. There are generally three types of approaches, "Cost approach", "Market approach" and "Income approach".

1) Cost Approach
The cost approach includes the "Historical cost method" and "Restructuring cost method".
Historical cost method is a method for evaluating values of the subject intellectual property right based on the cost spent on its acquisition procedures. With regard to a patent right for example, the total costs spent in research and development of the invention and the obtainment and maintenance of the patent right are a value of the intellectual property.
Therefore, based on the data of the expenses, such as research and development costs required for the invention of the patent right, filing cost of the patent application and maintenance fees after grant etc., the value of the patent right can be easily calculated by this method.
The restructuring cost method is a method for evaluating values of the subject intellectual property right based on the costs that would be incurred if it were restructured. The costs incurred by the restructure are regarded as a value of the intellectual property. If the restructuring costs of properties are easy to calculate, e.g., software etc., the restructuring cost method can be easily applied.

2) Market Approach
The market approach is a method for evaluating values of the subject intellectual property based on transaction prices of other intellectual property that is similar to the subject intellectual property.
The market approach originally aims for evaluating a corporate value based on a market value or a stock price of the corporate, and the concept of the approach is accordingly applied to the evaluation of the intellectual property.
Please be advised that in the case of stock price, taking into thorough consideration of the corporation's performance etc, it is possible to make an objective evaluation since the stock price is determined through the actual transaction between the seller and buyer. With the intellectual property however, it is still difficult to calculate the transaction price of the subject intellectual property based on that of similar intellectual property since transaction amounts of the intellectual properties itself are few.

3) Income Approach
The cost approach and the market approach described above are methods for evaluating the values based on past numerical values etc. In contrast with these, the income approach is a method for evaluating the values based on an estimation of possible prices or changes to happen etc.
Specifically, in the income approach, values of possible incomes to be generated by the subject intellectual property (future free cash flow) are changed into present values, and their sum is regarded as a value of the intellectual property. This method is also called DCF (Discounted Cash Flow) Method.
Regarding the incomes generated by the intellectual property, if the amounts of the present and future incomes do not differ, the present and future values will differ. Therefore, the income approach changes the value of the future income to that of present income in order to connect "future" with "present" in "future income". The sum of the present values is evaluated as future incomes the intellectual property will generate.


Outlined in Table 1 is the cost approach, the market approach and the income approach.

Table 1: Basic Approaches to Evaluation of Value of Intellectual Property

Approach Method	Summary
Cost Approach	Method for evaluating values of intellectual property based on the cost that had been spent in its acquisition procedures＜Specific methods＞Historical Cost Method, Restructuring Method, etc.＜Advantage＞Easy to make an objective evaluation＜Disadvantage＞Does not reflect future profits or risks caused by the intellectual property
Market Approach	Evaluation method based on the current price of the intellectual property＜Specific method＞Guideline company transactions method＜Advantage＞・Easy to make an objective evaluation・Reflect profits or risks＜Disadvantage＞Difficult to collect data because few transaction markets exist
Income Approach	Method for evaluating the present value of the future cash flow generated by the intellectual property＜Specific methods＞DCF Method, Real Option Method, etc.＜Advantage＞Reflect future profits or risks＜Disadvantage＞The value greatly changes due to an approach to a future plan

Reference: Watanabe Shunsuke, "Intellectual Property -Strategy, Evaluation, Finance", Tokyo Keizai Shinpousha

3. Conclusion
In recent years, people have been requesting patent attorneys as specialists of intellectual property to evaluate the values of intellectual property. In order to respond to their requests, The Japan Patent Attorney Association established the Intellectual Property Evaluation Promotion Center in April 2005, and started to work on the evaluation of the values of intellectual property.
I, Teru Yamamoto, registered as a candidate with the center to become an intellectual property estimator. Through the training program for estimators held by the center, I am striving to acquire the expertise and know-how.
With this knowledge, I will use the evaluation method to the best of my ability to update the values of intellectual property according to the information from the training program.
Thank you very much for your interest in my column. Please contact us if we can be of any assistance to you regarding this matter.

References:
1) WATANABE Shunsuke, "Intellectual Property -Strategy, Evaluation, Finance", Tokyo Keizai Shinpousha
2) SUZUKI Kimiaki, "Evaluation of Intellectual Property", IMS Booklet, No.2
3) The Japan Patent Attorney Association, Intellectual Property Evaluation Promotion Center, written materials of the estimator training program