An Overview of Intellectual Property and Intangible Asset Valuation Models

This paper reviews the economic models most commonly applied to estimate the value of intellectual property and other forms of intangible assets. It highlights the key strengths and weaknesses of these models. One of the apparent weaknesses of the most commonly used valuation models is the failure to incorporate legal rights into their calculations. Creation, maintenance, and enforcement of legal rights of ownership and control for intangible assets form a critical component of the total economic value of those assets. The failure to account for the value of those rights undermines the accuracy and the utility of the overall asset valuation process. This paper advocates a concerted effort by professionals involved in intellectual property law and intangible asset development and management to integrate more effectively the legal aspects of intangible asset creation, protection, and transfer into asset valuation models. Absent such integration, all intangible asset valuation models will continue to be incomplete. For research administrators involved in contract negotiation, intellectual property, and technology transfer, an understanding of these models is useful for job performance and professional development. COMMON VALUATION MODELS For the purposes of this paper, intellectual property includes all material that can be protected and managed under traditional legal principles of patents, copyrights, and trademarks. Intangible assets are those intangible materials that have commercial value, but are not in a form eligible for traditional intellectual property law protection. For example, while computer programs and music recordings can be characterized as intellectual property, as they are protected under the traditional intellectual property law rights, databases and other factual compilations may be more appropriately characterized as intangible assets, as they are not widely protected by intellectual property law. Developers and users of intellectual property and other intangible assets commonly apply a range of different economic models to estimate the value of that property. The choice of Research Management Review, Volume 14, Number 1 Spring 2004 © 2004 National Council of University Research Administrators 34 model for that valuation is largely driven by the goals and concerns of the party developing the valuation. The most common models are: cost-based, market-based, income-based, and options.