The Technology Factor Approach
The Technology Factor measures the extent to which cash flow derived from the practice of a technology is based on the technology asset itself. It is a measure of the fair market value of the intellectual property separate from the business as a whole.
In the technology factor approach, the present value of the business's ongoing cash flow is determined first using an income approach. Then attributes reflecting the commercial strengths and weaknesses of the technology are reviewed from the point of view of both the buyer and the seller. The result of this process determines the technology's relative contribution to cash flow and fair market value. Thus, this approach allows us to separate the value of the technology from the value contributed by other assets of the business.
The technology factor software tool is designed to calculate the contribution of the technology to the total value of the business utilizing that technology. Arthur D. Little developed the original methodology, and Dr. Sam Khoury simplified the process during his work at The Dow Chemical Company. The process was later developed into an efficient software tool.
The technology factor method also has been tested in the valuation of several technologies and its accuracy in determining the actual market value of those technologies was verified.
The Technology Factor Approach...
Was developed originally as a communication tool between R&D and business
Is used by licensing executives to buy & sell technology
Is used by patent attorneys to determine where and how to file
Is used by upper management to gauge the importance of technology as a key driver of the business
The Mechanics of Valuation: