Intellectual property valuation: how to approach the selection of an appropriate valuation method

Published date19 October 2010
DOIhttps://doi.org/10.1108/14691931011085641
Pages481-503
Date19 October 2010
AuthorCéline Lagrost,Donald Martin,Cyrille Dubois,Serge Quazzotti
Subject MatterAccounting & finance,HR & organizational behaviour,Information & knowledge management
Intellectual property valuation:
how to approach the selection of
an appropriate valuation method
Ce
´line Lagrost, Donald Martin, Cyrille Dubois and Serge Quazzotti
Public Research Centre Henri Tudor, Technology Watch Centre,
Luxembourg-Kirchberg, Grand-duche
´de Luxembourg
Abstract
Purpose – This paper aims to assess how to select an appropriate intellectual property valuation
method according to the valuation situation and context.
Design/methodology/approach – The article describes the difference between the quantitative
and qualitative methods and principles. It reviews the principal approaches and methods used to
evaluate an intellectual property asset and proposes a framework to help the evaluators to select an
appropriate valuation method. The paper initiates a discussion on the parameters and requirements
that influence the choice of an IP valuation method in order to reach the expected valuation result.
Findings – This paper provides useful guidelines for any evaluator who would be responsible for
executing an IP valuation and who would be faced with the difficult task of choosing an appropriate IP
valuation method. It is the intention of this paper to develop a synthesised and integrated procedure
for the selection of an IP valuation method.
Research limitations/implications – The limitation of this paper is that not all of the existing
methods were described and taken into account in the final proposed procedure. The authors made a
series of assumptions and a selection of the methods that may not be entirely shared by other
researchers and practitioners. The authors are conscious that this constitutes a first proposal in the
selection process of the most relevant IP valuation method. Further discussions and developments
would be carried on in the future to enhance the proposed procedure.
Originality/value – This paper proposes a framework to orientate the choice of an appropriate IP
valuation method according to the context and situation in which the valuation is to be implemented.
Keywords Intellectualproperty, Assets valuation, Quantitativemethods, Qualitative methods
Paper type Conceptual paper
1. Introduction
When performing an intellectual property (IP) valuation, experts in the field can utilise
several different approaches to arrive at an acceptable solution. Methods used for
business purposes can be divided into two groups: Quantitative or Qualitative
valuation methods (Kamiyama et al., 2006). Often, before any other aspects of the
valuation process are considered, the analyst first finds himself in the position of
choosing between the application of a qualitative or quantitative method.
The quantitative method can be described as a technique using any numeric al
information or measurable data. This method is often considered to be systematic,
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1469-1930.htm
This work has been developed thanks to the financial support of the Luxembourgish Ministry of
the Economy and Foreign Trade, whose goal is to raise the level of knowledge and competency in
the IP valuation domain. The authors would like also to thank M. Lex Kaufhold, Director of the
Intellectual Property Office in the Ministry of Economy and Foreign Trade in Luxembourg for
helpful discussions which assisted in the redaction of this paper.
Intellectual
property
valuation
481
Journal of Intellectual Capital
Vol. 11 No. 4, 2010
pp. 481-503
qEmerald Group Publishing Limited
1469-1930
DOI 10.1108/14691931011085641
reproducible, can be projected and provides an objective approach. From an IP
valuation point of view, quantitative methods attempt to calculate the monetary or
economic value of the IP (IP4Inno project, 2008).
On the other hand, a qualitative method involves a rigorous examination of the
current or intended use of the IP by analyzing its properties, states or characteristics.
The results of an analysis performed via the qualitative method are generally not
expressed in monetary terms. This method determines the value of the IP under review
by understanding the processes and the behavioural patterns linked to the use of the IP
and by examining other non-numeric characteristics. A qualitative valuation is often
considered to be an interpretative and subjective evaluation.
In the IP valuation domain, qualitative methods provide a value reference mainly
through the rating and scoring of IP assets (IP4Inno project, 2008). By definition, a
rating and scoring process evaluates an IP asset by assigning a rate (an amount
measured in relation to another amount) or a score (a number/letter indicating the
quality/amount/position) against factors that impact the IP asset’s value. To give an
example, from Hagelin (2002), five components have to be defined in order to pursue
this type of approach: Scoring criteria (factors which impact the IP asset’s value);
Scoring system (values to be assign to the scoring criteria); Scoring scale (the method to
apply the scoring system);Weighting factors (factors to be applied to the scoring
system in order to differentiate the importance of the scoring criteria); And the use of a
decision table (combination of the scoring criteria, scoring systems and weights that
will produce a composite score for the IP asset being analysed).
While a quantitative valuation would answer the question “how much”, a
qualitative approach would be seen as an investigation of the why and how of decision
making related to the use of the IP. (Trochim, 2006). The choice of using one approach
rather than the other is often subject to controversy. Experts in favour of quantitative
methods argue that it is the only objective way of evaluating an IP asset that is based
on a scientific approach. Those experts in favour of the qualitative method argue that
the use of only quantitative methods will neglect non-measurable factors which may be
important to understanding the complete value of the IP to an oragnisation. But, for
Trochim (2006), making too clear a distinction between the use of qualitative and
quantitative approaches is not entirely correct. He argues that qualitative data can be
coded quantitatively when quantitative information is based on qualitative judgement.
So which approach should an evaluator choose when beginning to value an IP
asset? What are the factors and conditions that an evaluator would have to take into
account in order to make a selection from what could be considered as two
diametrically opposed starting points? What are the advantages and disadvantages of
quantitative/qualitative approaches and would a hybrid of the two provide evaluators
with a better foundation for analysis?
This paper will provide the evaluator with a framework for answering these
questions. It presents a comparison of the main quantitative and qualitative
approaches that currently exist. It describes the principal advantages and
disadvantages of different valuation methods from both the quantitative and
qualitative domains so that the examiner can select the best method based on their
specific evaluation requirements. An analysis of the qualitative and quantitative issue s
will help to identify the strengths and weaknesses of each approach. This will also
reveal clues about how these different approaches can complement each other.
JIC
11,4
482

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