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Up to date on: 29.1.2008
Provided by: Hungarian Patent Office
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2. Market based methods

Market based methods value IP through comparison with prices achieved in recent comparable or similar IP transactions between independent parties.  Observing the prices of comparable assets traded between parties in an active market gives a value to the subject IP.  The idea behind these approaches is that the market decides the accurate price and therefore the value of the IP.  Market based methods include IP auctions, comparable market and comparable royalty rate methods.

·        Auction

In a perfect auction, there are many potential buyers with perfect information about all aspects of the IP.  The value of the IP is determined by the price reached through bidding. 

·        Comparable market value

The value of the IP is given by comparison with similar comparable independent IP or similar transactions.

·        Comparable royalty rate

Market based valuation methods may also be based on the comparison of royalty rates used when licensing similar IP.  Many sectors often use industry averages as a basis for setting royalty rates in license agreements or in establishing damages in litigation.  The value of the IP is given through the comparison of the subject IP with the royalty rates in similar license agreements. 

When are they used?

Market based methods are useful when a market value is required for any given subject IP.   These methods require an active market, a comparable exchange of IP between two independent parties and sufficient access to transaction price information.  However, there are limited formal markets for IP and the relevant pricing information is not usually public.  As a result, the use of the comparable market value approach to valuing IP is rare.  The use of comparable royalty rates are more widespread, especially as databases of industry royalty rates and comparable transaction information have been collated by larger IP right-holders and independent companies offering valuation services.  In the future, when IP markets become active and public, the use of market based approaches can become more established.

Advantages and disadvantages of market based methods
Observing the market is a relatively straightforward valuation method.  It is useful to check the validity of other approaches.
As well as the issues raised about the lack of IP markets and information, there are many other disadvantages to these approaches.  Firstly, the uniqueness of IP makes direct comparison difficult.
There is a risk of comparing the subject IP with other IP which has been traded but which has still not been utilised to the full extent possible.  In these cases the IP can be undervalued.   When royalty rates are compared there are also some potential distorting problems.  Royalty rates set using returns to R&D costs, return on sales figures or industry averages run the risk of valuing costs or other factors rather than value.

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