IP Valuation: Selecting Methods by Asset Type and Commercial Maturity

MILES Valuation Advisory Limited — Insights

Executive Summary

Hong Kong launched the Pilot Patent Valuation Support Scheme on 2026-09-30, providing funding for businesses to value patents and other intellectual property.[1] Technology still undergoing validation, IP generating established licensing income, and software used internally present different valuation questions. This article examines how economic function, commercial maturity and available evidence guide method selection and turn information into analysis that can be reviewed.

Policy Context: From Owning IP to Understanding Its Economic Value

The two-year scheme provides funding on a 1:1 matching basis between the Government and eligible small and medium-sized enterprises. Each approved enterprise can receive a one-off grant capped at HK$80,000 to engage qualified service providers to value patents and other IP assets. On the same day, the Government announced that the first seven pilot cases under the Intellectual Property Financing Sandbox had secured credit approval.[1]

These initiatives give businesses a more concrete reason to examine IP value. The method selection and analytical considerations below are professional analysis, rather than procedures prescribed by the Government announcement.

1. Three Questions Before Selecting a Method

First establish the rights, territories, uses and supporting assets within the valuation, including restrictions on use, transfer and reliance on third parties. A product's use of a technology does not mean that all its earnings are protected by the rights being valued.

How does the IP generate economic benefits? Technology may support product sales, reduce costs or earn royalties. Software may be sold externally or used only within the business. Its function determines whether the analysis focuses on income, savings or replacement cost.

How far has commercialisation progressed? Technical validation, customer qualification, initial sales and established revenue represent different stages, with different forecast evidence, investment needs and risks.

What evidence is available? Licence agreements, product revenue and gross profit, alternative processes, replacement costs and IP transactions support different analyses. Select the method whose key inputs have the strongest support, rather than applying a model solely by asset name.

2. Maturity Changes the Focus of the Analysis

Development or Validation: Establish the Route to Commercialisation

Identify the remaining milestones, time and investment before analysing earnings after successful commercialisation. The income approach can use scenarios; probability-weighted cash flows require support for the probabilities rather than arbitrary success rates.

The cost approach requires consideration of whether comparable utility can be recreated lawfully and within a reasonable time. Replacement cost may not capture exclusive rights or commercial opportunities that are difficult to replicate. An absence of revenue is insufficient to determine that the cost approach should be used. The market approach can also be considered, using transactions at comparable development stages and examining validation progress, further costs and commercialisation risks.

Two patents that have yet to be commercialised may have very different valuation evidence: one may have passed key tests and await customer qualification, while the other still needs to demonstrate technical feasibility. A label such as “early-stage IP” cannot replace that assessment.

Initial Commercialisation: Connect Growth to Customers and Capacity

Revenue forecasts should link to sales volumes, prices, capacity and delivery arrangements, distinguishing orders from trials and opportunities yet to convert. Rapid initial growth should not be extrapolated indefinitely.

The market approach also requires comparison of customer adoption, revenue scale, profitability and expansion investment. Technology dependent on a few trial customers and technology generating repeat orders cannot directly share transaction multiples simply because they operate in the same field.

Established Earnings: Assess Their Continuity

Where licensing income already exists, net cash flows can be forecast by agreement, reflecting minimum guarantees, sales-linked receipts, renewal, termination and costs borne by the rights holder. Once licensing income is forecast directly, it should not be multiplied by another royalty rate.

Stable income still requires examination of concentration and competition. With sufficient comparable rights transactions, the market approach can be a primary analysis or a cross-check; maturity alone does not ensure that adequate transaction information exists.

Replacement or Declining Earnings: Estimate the Remaining Benefits

Forecasts should reflect declining earnings, maintenance costs and remaining use. Legal life is not the same as economic life, and terminal value cannot rely on unsupported long-term growth.

Market comparisons should address remaining earnings and life. Earlier transactions involving assets still growing may be unsuitable. Transactions involving IP being phased out also require examination of forced-sale conditions or buyer-specific synergies.

3. Selecting Methods for Different Types of IP

The table provides starting points, rather than fixed classification rules. Relief-from-Royalty (RfR) and the Multi-Period Excess Earnings Method (MPEEM) are both income methods.

The market approach can apply to all these types where sufficient transaction evidence exists. All three approaches are covered by IVS 210.40.01–40.02. Selecting an approach by the basis of value, asset characteristics, strengths and weaknesses of methods, and data availability is also consistent with IVS 103.10.04.[2] The analysis of type and maturity here puts that principle into practice.

Core Technology: Compare the Evidence for MPEEM and RfR

Where technology is the main source of a product line's profits and supporting asset contributions can be reasonably assessed, MPEEM may be considered, deducting appropriate returns for those assets from the relevant earnings. Multiple IP assets sharing revenue must not receive the same residual earnings twice. IVS 210.60.17 states that the excess earnings method should be applied to only one intangible asset for a given income and earnings stream, generally the primary asset.[2]

RfR requires support for both the revenue base and royalty rate. A licence package may include several patents, know-how, support and milestone payments, so headline rates alone are insufficient. IVS 210.60.19(b) allows rates to be derived from comparable licences or a hypothetical arm's-length profit split, with support still needed for the IP's profit contribution.[2]

The choice depends on the reliability of supporting asset allocation and royalty derivation. More model detail does not necessarily produce a more reliable result, and an assumed “industry rate” is insufficient.

If product profits also depend on a brand and customer channels, their contributions must be addressed. If licensing evidence includes ongoing technical support, the services covered by the rate must be identified. These assessments determine a method's suitability for the subject IP; the model's name cannot resolve them.

Processes, Software and Content: Attribute Benefits to the Subject Asset

Process efficiency differences must be translated into net cash flows using expected usage, implementation timing and demand, including capital and working capital investment. Extra capacity without demand may not generate equivalent benefits.

Software and content income may depend on ongoing delivery. All earnings from next-generation software or works yet to be created cannot be attributed to existing IP; reasonable updates and expenditure needed to sustain existing earnings should not automatically be excluded either.

Market Approach: Suitability Depends on Transaction Information

The market approach can be a primary method or a cross-check. IVS 210.50.03 requires consideration of IVS 103.20.02–20.03, together with arm's-length transactions in identical or similar assets at or near the valuation date and sufficient information to adjust for significant differences.[2]

In practice, information is often the constraint. IVS 210.50.04 notes that the heterogeneous nature of intangible assets and their infrequent separate sale limit available evidence.[2] Announcements may not fully disclose rights or payment terms; transactions may include other assets, and an upfront payment may represent only part of the consideration. A company's acquisition price cannot be treated directly as the price of a single IP asset, and a database cannot fill gaps in undisclosed terms.

Adjustments for rights, territories, exclusivity, maturity and remaining life need support. The revenue or profit denominator of a price multiple must also match the rights sold. Where substantial qualitative adjustments are needed, another approach may be more appropriate (IVS 210.50.05).[2]

A limited-term licence for a single territory and a worldwide permanent transfer of rights in the same work represent different economic benefits. Milestone payments and revenue shares cannot simply be treated as certain cash consideration; their conditions and contribution to total consideration require analysis.

The guideline transactions method is generally the applicable market method for IP (IVS 210.50.07). Using comparable royalty rates to construct RfR cash flows remains an income approach.[2] Where the circumstances specified in IVS 103.20.02, such as a recent transaction in the subject asset, apply, the market approach should be used and given significant weight.[2]

4. Turn Information into Analysis That Can Be Reviewed

Search and screen transactions. Build a candidate list from announcements, listed-company disclosures, licensing documents and databases. Check dates, consideration, rights and commercialisation stage, distinguishing IP transfers from business acquisitions and licences. Record search coverage and exclusion reasons, then determine whether evidence supports a primary valuation, a cross-check or an individual input. Missing material terms should not be filled by arbitrary discounts; insufficient comparable evidence does not mean that no transactions exist.

For retained transactions, explain which differences can be adjusted using data and which require judgement, including arm's-length status and unusual financing terms. More observations do not necessarily improve reliability if all lack terms material to price.

Define the income or cost scope. Align client forecasts with products, rights, territories and agreements, reconcile financial records, and distinguish contributions from services, other assets and future IP. Cost analysis estimates investment to recreate comparable utility, excluding historical work that no longer serves a purpose, consistent with the replacement cost basis in IVS 210.70.01.[2] Where market evidence is insufficient, consider income or cost approaches using other evidence; do not default automatically to cost.

Support assumptions and risk treatment. Identify contractual, historical or external support for revenue, rates, usage, development timing and costs, and disclose where management judgement remains central. Economic life should reflect commercialisation, renewal or replacement. Risks already addressed in cash flows should not be counted again in the discount rate, and a fixed IP premium should not be added mechanically to WACC. IVS 210.90.02 and 100.02–100.03 provide relevant discount rate and economic life considerations.[2]

Client forecasts are important inputs, but the valuer must still assess whether their conditions align with agreements, capacity and actual progress. Information limitations should affect scenarios, method selection and how conclusions are expressed, rather than be concealed by model complexity.

Check the result's reasonableness. Are royalties compatible with the licensee's profit? Do technology earnings double-count other assets? Does the alternative provide comparable utility? IVS does not require multiple methods in every valuation. Where several are used, differences must be explained and reconciled; materially divergent results should not simply be weighted together (IVS 103.10.05–10.07 and 10.09).[2]

Practical Implications for Businesses, Auditors and Valuers

Businesses and finance teams: Establish the rights, uses and development progress, then prepare licence agreements, product financial information and validation evidence. A company-wide forecast alone may be insufficient for a single IP asset.

Auditors: Examine whether the method, attribution of earnings and inputs fit the asset's circumstances. The scope and basis of value of a financing valuation require separate assessment before use for financial reporting.

Valuers: Present the method selection rationale, evidence and limitations of alternatives clearly. Assessments of legal rights or technical feasibility should connect with relevant specialists' work.

Conclusion

Professional judgement in IP valuation connects economic function, maturity and evidence to methods, models and assumptions, so users can understand where value comes from. Businesses can discuss the scope and information requirements for specific IP with MILES to support financing, licensing or transaction decisions. The valuation amount does not directly equate to the amount that can be borrowed.

References

1. Hong Kong Government News: IP financing sandbox cases approved, published 2026-09-30; accessed 2026-10-05.

2. IVSC, International Valuation Standards, effective 2025-01-31, ©2024. IVSC standards and chapters; original PDF hosted by SAICA. This article briefly paraphrases verified passages from IVS 103 and IVS 210 and is not a comprehensive summary of the standards. Accessed 2026-10-05.

This article is prepared for general information purposes and does not constitute audit, accounting or valuation advice. Readers should refer to the official scheme documents and applicable professional standards for guidance relevant to their engagement.

About MILES Valuation Advisory Limited

MILES is an independent valuation advisory firm based in Hong Kong, providing business valuation, purchase price allocation, impairment testing, share-based payment and financial instrument valuation services, with an emphasis on supporting evidence and reports that can be reviewed.