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IP Valuation – Income Approach

IP Valuation – Income Approach

Cornelia Mahulea, CEO Inventa

IP valuation is a complex process that requires expertise in finance, intellectual property, and market analysis.
This is just a simplified model of calculation that can can be used as a starting point for a more complex analysis.
There are several evaluation methods and they should be correlated to obtain the most accurate estimate.

The problem:

Company X is a pioneering tech start-up that has developed an innovative, patented technology.

In its first year on the market, Company X made $10,000,000 in profit and the company projects annual profit growth of 10% per year for the next 4 years.

For the discount rate we can consider 11%, 14%, 17% and 20% for year 1, 2 ,3 and 4, respectively.

IP Valuation using income approach:

Is calculated by estimating the future economic impact at the appropriate discount rate for the lifetime of the patent (or 4 years in this case).

The method is based on the evaluation on the cash-flow prediction (for the following years) and the to apply the discount rate to obtain the current value.

Below are details and formulas used in Excel for calculation.

PV = FV/(1+r)^n where FV = Future Value (Projected Net Income), r = discount rate, n = Year number (order)


Year 1Year 2Year 3Year 4Total PV
Projected Net Income$10,000,000.00$11,000,000.00$12,100,000.00$13,310,000.00
Discount Rate11141720
Present Value$9,009,009.01$8,464,142.81$7,554,883.73$6,418,788.58$31,446,824.14

Limitation:

For the new technologies appearing on the market, is difficult to predict the sales and therefore very difficult to correctly estimate the value.

Even the data were available, the calculation could be difficult because all the data from the lifetime of the IP asset would have to be taken into account, this would be a big effort.

The evaluation could be difficult when there are both proprietary and non-proprietary IP assets.

The method was presented in WIPO Advanced Course on Intellectual Property Management.

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