The Income Approach values assets based on the present value of the future income streams expected from the asset under consideration. Several generally accepted methodologies fall within the Income Approach related to assessing the value of the intellectual property including:
The Relief-From-Royalty Payment Method
This Payment Method is based on the premise that a property’s value can be measured by quantifying the amount of income that could be generated from licensing the intangible asset. From the inbound license perspective, this method considers what the actual owner would be willing to pay as a royalty rate to a hypothetical owner who would inbound license the use of the intangible asset. From an outbound license perspective, this method considers what the actual asset would charge to a hypothetical licensee to license the asset to that third party. In both cases, the selected royalty rates typically are market-derived and are based on arm’s-length third-party licenses or Comparable Uncontrolled Transactions.
The Incremental Earnings Method
The Incremental Earnings Method is based on the premise that a property’s value can be measured by the incremental earnings achieved by the product incorporating the subject intellectual property relative to a comparable product that does not incorporate the subject intellectual property. The excess earnings may result from (a) the owner generating a greater amount of revenue by owning or operating the intangible asset compared to not owning or operating the asset.
The Profit Apportionment (Split) Method
The Profit Apportionment Method is based on the premise of evaluating the share of the licensee’s anticipated profit a licensor may seek in return for providing the licensee with access to the intangible assets. This method considers what the owner provides (the intangible asset) and what the operator provides (the working capital assets, the tangible personal property, and real estate assets, and the routine intangible assets used in the business). Each party (the owner and the operator) receives a split of the total business operating profit commensurate with their relative contribution to that business. Profit apportionment analyses attempt to divide the anticipated profit under a licensed product in a manner that is commensurate with the nature of the intangible asset and the risks assumed by each party to the transaction.
The Differential Income Method
The Differential Income Method is based on the premise of comparing the income (or another relevant measurement such as revenue, expenses, inventory balances, etc.) generated by a business and comparing that amount to a defined benchmark. The benchmark measure could be (a) the owner income without the intangible asset, (b) the owner income using a prior generation of the intangible asset, (c) an industry average level of profitability, (d) a level of profitability earned by identified guideline companies, or (e) some other benchmark income measure. The differential income measure does not necessarily have to be owner/operator operating income, net income, or net cash flow. Rather, the differential income could be measured by the difference in just about any owner/operator’s financial fundamental.