Helpful Information / Articles: Licensing - Valuation Approaches for a Licensing Agreement
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In determining the value of the intellectual property to be licensed and hence the value of the license, one needs to look at the economic advantage of the intellectual property, any barriers it raises to competition with others and whether it can open up or maintain a strong market position. Determining a fair amount to pay for license has a number of approaches, three of which are the market, cost and income approach.

Market Approach
In the market approach, the value of a license is determined by looking at comparable licenses and products in a similar market area. For example, if the license is for a patented electronics product, other license arrangements in this electronics area would be examined to see how others value similar products. This type of approach may work well in an area where this type of information is commonly known and available.

Cost Approach
In the cost approach, the vale of a license is based upon on the costs of developing the intellectual property. For example, in valuing a set of patents to be licensed, the cost of developing the technology and the patent costs would be considered in setting the license fee. If the license is for a trademark, the cost of obtaining the trademark and the costs associated with publicizing the trademark would be considered. This is probably one of the least effective ways of adequately determining a fair license fee. One major pitfall with the cost approach is that while certain technology or products may be very expensive to develop and may even be superior, buyers may not be willing to pay the cost if a less expensive alternative is available. Another problem is that inventions that are simple and inexpensive to develop, yet have huge market appeal would have too low a licensing fee with the market approach.

Income Approach
The income approach to determining license fees focuses on what the intellectual property can earn in the open market. Inherent in this calculation is an assessment of the amount of income that can be generated, over what length of time, and the risks associated with collecting that income over time. A problem with this approach is that it is often very difficult to accurately determine these factors.

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