Market Approach
Author | Russell L. Parr |
Profession | President of Intellectual Property Research Associates |
Pages | 87-94 |
CHAPTER 7
MARKET APPROACH
The market approach determines the value of a property by considering the price at which
similar property has exchanged in an open market. It is very useful for properties such
as real estate, automobiles, and ne art. The uniqueness of intellectual properties makes
nding market transactions of similar property a challenge.
FASB’s denition of the market approach is as follows:
The market approach uses prices and other relevant information generated by market transac-
tions involvingidentical or comparable assets or liabilities (including a business). For example,
valuation techniques consistent with the market approach often use market multiples derived
from a set of comparables. Multiples might lie in ranges with a different multiple for each
comparable. The selection of where within the range the appropriate multiple falls requires
judgment, considering factors specic to the measurement (qualitative and quantitative).Valu-
ation techniques consistent with the market approach include matrix pricing. Matrix pricing is
a mathematical technique used principally to value debt securities without relying exclusively
on quoted prices for the specic securities, but rather by relying on the securities’ relationship
to other benchmark quoted securities.1
The market approach provides an indication of value by observing what others have
agreed upon as a fair price in arm’s-length, open-market transactions involving property
similar to the subject. That is, the virtual transaction is compared with actual transactions
judged to be comparable. Like the cost approach, the market approach is based on the prin-
ciple of substitution that instructs that a prudent buyer would not pay more for property than
it would cost to purchase a comparable substitute. Employment of this approach requires
identifying transactions of comparable property that:
• Are part of an active, public market and for which the price and terms are known
• Are contemporaneous with the virtual transaction
• Are between parties dealing at arm’s length
A key for this approach is to nd transactions of reasonably comparable property because
exact comparisons are not likely to be discovered.
MARKET TRANSACTIONS OF INTELLECTUAL
PROPERTY INDICATE VALUE
The exchange of intellectual property in the marketplace typically is completed as part
of the exchange of an entire company or division. Rarely do we see a specic patent or
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