Valuation Principles

• Author: Russell L. Parr
• Profession: President of Intellectual Property Research Associates
• Pages: 67-74

CHAPTER 5

VALUATION PRINCIPLES

Basic valuation principles will be discussed before any attempt is made to address the

very specialized challenges of valuing specic intangible assets and intellectual property.

Because these assets are nearly always part of the aggregation of assets that constitute a

business enterprise, this chapter addresses the principles that underlie a business enterprise

valuation.

An appraisal is an opinion about the attributes of something. An appraisal can address the

attractiveness, style, quality, size, weight, or color of an object. Herein the terms appraisal

and valuation are used interchangeably to mean an opinion of the monetary value of prop-

erty. An alternativeway of dening a valuation is that it describes an assumed (or “virtual”)

transaction. It is an estimate of the consideration exchanged in a transaction that has not

taken place. Therefore, a valuation must describe the property rights presumed to be the

focus of the transaction and the terms assumed, in order to make clear the meaning of

the value estimated. Stated another way,we must completely describe the virtual transaction

in order to understand its result.

PREMISE OF VALUE

Value is the representation of all future economic benets of ownership, compressed into

a single payment. If property rights are exchanged in an arm’s-length transaction between

knowledgeable parties, the agreed-upon price is both the market value at that moment

and, to the buyer, the “cost.” Both buyer and seller have considered the future economic

benets of owning the property rights and have come to an agreement about their present

value. As time passes, however, the price (of that transaction) never changes, and the cost

to the buyer therefore remains the same. The market value of the rights, however, is subject

to continual change as the future benets increase or decrease with the passage of time.

As a result, an opinion of value can be expressed only relative to a given moment or “as

of” a specic date.

In addition, the future benets of ownership cannot be quantied without dening whose

ownership is assumed and/or the underlying purpose of the valuation. The distinction of

ownership and purpose is essential to the appraisal process. A valuation cannot proceed

without a denitive premise of value. A meaningful value cannot be determined without an

answer to the question, “What is my car worth?” because additional information is neces-

sary. Value does not exist in the abstract and must be addressed within the context of time,

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