Valuation Errors
Author | Russell L. Parr |
Profession | President of Intellectual Property Research Associates |
Pages | 130-141 |
CHAPTER 10
VALUATION ERRORS
Chapter 9 discussed the errors of double counting risk when conducting a discounted cash
ow analysis. This chapter will discuss other common errors made in general and for
specic intellectual property and intangible asset valuations. It will also discuss special
valuation situations.
ALLOCATING VALUE AMONG INTELLECTUAL PROPERTIES
When analyzing a product line, economic contributions can come from more than one intel-
lectual property. In some cases, the dening intellectual property is a patented feature or
patented manufacturing process. In other cases, a trademark is the dening feature. A com-
plication arises when a product line benets from the economic contributions of several
intellectual properties.
Sometimes both a trademark and a patent dene a product line. In these cases, the eco-
nomic contribution attributed to the intellectual property asset category must be subdivided.
Suppose, for example, the following economic contribution analysis was accomplished for
a new product line of One Product Company,Inc., using the weighted average cost of capital
allocation process previously presented.
Exhibit 10.1 shows that the intellectual property of Advanced Product Line contributes
earnings at 7.5% of sales. Suppose the dening characteristics of the product line are a
combination of patented features and a well-regarded trademark. In this case, the 7.5%
must be allocated between the patented technology and the trademark.
One solution is to subtract a royalty rate considered appropriate for association with
the patents or trademarks. Suppose comparable patents are licensed for 3% of sales. Then
4.5% of sales would be attributed to the trademarks of Advanced Product Line. The problem
with this method is that the 3% royalty rate likely does not fully reect the total economic
contribution from the patented technology.
Remember, royalty rates represent a splitting of the economic benets of licensed intel-
lectual property between the licensee and the licensor. The 3% royalty rate is only part of the
total economic benet derived from the patented technology,so following this methodology
probably overstates the contribution of the trademarks.
A better way to divide the 7.5% of sales between the trademark and the patents is to nd
one or more companies similar to the subject business enterprise but lacking either patents
or trademarks. Then allocate the total economic benets for each of the peer-group compa-
nies among their monetary, tangible, and intangible assets and intellectual property. If the
peer-group companies possess patents but not a signicant trademark, then the amount
of economic benet allocated to the intellectual property of the peer-group companies
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