4. The market method
The market method, also known as the comparables method, assumes that the value of an intangible asset is equal to the amount of licensing fees that a company saves by owning the asset and not having to license it from a third party.
The difficulty in applying this method is determining the applicable royalty rate if the technology has not yet been exploited or licensed.
Only a study of the market, i.e. transactions that have already taken place in a comparable field, can enable us to estimate this royalty rate. In general, the royalty rate varies between 1% and 10%, with an average of 5% of sales in all sectors.
However, companies rarely disclose these figures, which are strategic data that they do not wish to share with their competitors. Even when licensing contracts are recorded on patent registers, the financial...
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The market method
Determining the future operating period
Bibliography
R. Goldscheider, J. Jarosz and C. Mulhern, Use Of The 25 Per Cent Rule In Valuing IP , LES News, December 2002
Websites
http://www.ipresearch.com/index.htm Intellectual Property Research Associates website, offering information on licensing rates by industry sector.
www.lesi.org Licensing Executives Society website
Acronyms and abbreviations
CAPM: Capital Asset Pricing Model
WACC: Weighted Average Cost of Capital
DCF: Discounted Cash Flow
EBITDA: Earnings Before Interest Taxes and Amortization
ENPV: Expected Net Present Value
ISO: International Organization...
Vocabulary
Due diligence: financial audit
Cash flow: surplus of financial flows generated by the operation of intangible assets.
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