Valuation Practice

Valuation is the practice of estimating a defined monetary value for a

single or pooled intangible asset
Valuation processes are performed either for transactional (such as
commercial activities) or notational (such as accounting activities)
purposes.
Three main approaches to valuation exist (cost, market & income
approaches), each of which have specific strengths & weaknesses, and
therefore answer different needs

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Valuation in practice
General
A valuation process is structured in similar manners (tasks), whichever
approach (cost, market and/or income) is chosen
The different tasks include for such process

Objective definition
Standard of value selection
Appraised asset description
Valuation date or period selection

Data
collection
& analysis

Valuation approach(es) selection and related calculations

Results reporting
Always remember that a value is subjective, whereas a price is objective
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Valuation in practice
Cost approach
Cost approach : Measure the value of an intangible asset by taking into
account all relevant occurring costs and investments related to the
appraised asset
Historic costs : accounting all costs (effective and sunk) directly
related to the appraised asset (such as securing, research,
development, and licensing-in costs)
Replacement costs : valuing the costs for buying an asset bringing
the same utility than the appraised one
Reproduction costs : valuing the costs induced in creating, at the
time of the appraisal, a similar asset based on actual knowledge
Cost approach is generally used in situations of high uncertainty and
limited information exist
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Valuation in practice
Market approach
Market approach : Value consists in the price of a comparable asset in a
similar market transaction
Market approach relates to the quantification and adjustment of pricing
multiples in order to create theoretical comparable conditions
Lack of active and transparent market for IP transactions and market
dynamics have to be taken into account in the process

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Valuation in practice
Income approach
Income approach : Measure the value of an intangible asset by reference
to the expected and actualized benefits, incomes or saved costs over the
remaining life of the asset
Such prospective-based quantification of financial flows needs to take
into account various risk-related factors such as
Endogenous : Extend of IP protection, nature of competition,
Exogenous : Substitute product development risks, maturity of
market,

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Valuation process
Part 1 : Objective and standard of value definition
Clear definition and overview of the valuation objective is fundamental
This part of the process should answer the following questions
What is the intangible asset under valuation?
Why and for which use is the valuation done?
For whom is the valuation appraised, in which context?

Such definition helps clarifying the motives for valuation, which are not
neutral. Such motives could be related to :
Business and management (Mergers and acquisitions - M&A, Risk analysis,
Joint Venture funding, )
Technology (Licensing in/out, Transfer pricing, )
Accounting and financial (Liquidation, Fiscal benefits, )
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Valuation process
Part 2 : Appraised asset description and valuation date
Intangible assets can be described based on various criterias such as
Physical (example: what is the asset under valuation - single or bundled?)
Functionnal (example: what does this asset do?)
Technical (example: is the technology incremental or disruptive?)
Economical (example: what is the economic utility of the asset?)
Business (example: what is the market of this asset?)
Juridical (example: is there a title of ownership?)

Clear asset description is needed in order to select appropriate valuation

approach
Valuation date and/or time periods are used for appropriate actualization
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Valuation process
Part 3 : Valuation approach selection and calculation
Valuation approach selection is based on the information gathered
related to previous tasks in the valuation process (see previous slides)
Cost approaches relate to past (certain) or present (reduced uncertainty)
information. However, value is usually not correlated to costs.
Market approach relates to the financial adjustment of similar market
transactions to the valued asset. Uncertainty can be high, as market,
technological, and more generally techno-economic environmental
conditions can strongly differ.
Income approach, based on a prospective analysis of future economic
incomes, relies entirely on the validity of business and future economic
benefits analysis. Uncertainty, although adjustable, is therefore high. Income
approach is however the most used approach for valuation.

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Valuation process
Part 4 : Results reporting
Valuation results reporting depends on the reasons underneath the
valuation process
Particular attention should be given on
Confidentiality issues
Level of engagement related to the validity of the results

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When is valuation needed?

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Who is implied in a valuation process?

Key stakeholders in a valuation process are

Valuator
Client
Individual project members
Management
Employees implied in support-related activities
Third party experts
Experience shows that valuation processes benefit from implying as many
players related to the appraised asset as possible, in order to manage in the
information gathering process the natural routine-related myopia developed in
conducting day-to-day work.

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Pros & Cons

Pros

Valuation is a mean to answer fundamental needs in terms of financial

economic appraisal

Cons

Valuation will always remain a mix between an art and a science

Approach

Cost

Market

Income

Pros

Reduced
uncertainty issues

Simple theoretical
applicability

Always right (at

moment of
valuation)

Cons

Future value is not

correlated to costs

Information
asymmetry

Mostly wrong (due

to uncertainty)

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Practical example : software valuation

Why was valuation done?
Rationale for valuation

Context relates to the need for information in order to (1) decide on an IP

management strategy for the results of a R&D project and (2) gather
information for a technology license pricing negotiation

This valuation was done on a free software licensed development, bundled

with a restricted trademark with strong goodwill and a key role in a
community of creative users

The fact that the license for the software was free (Open Source) meant that
no monopoly for the software from a technical standpoint could be
transferred (therefore valued)

The software as such was protected only by copyright (no patents were
involved)

Business model for asset exploitation by licensee relied on a software as a

service (SAAS) strategy
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Practical example : software valuation

Why was valuation done?
Impact of valuation practice

Valuation methods used where based on cost and income approaches

Precise historical financial data was available, hence historical costs
were valued (Human resources, investments, )

Clear overview of technology was available (complete technology and IP

assessment was done), allowing us to value replacement costs

A light business plan was created, in order to gather all necessary

data for income approach valuation

This multiple approach gave us a useful range of value

This process was successful because it gave us information for license
pricing negotiations, therefore reducing uncertainty

The business plan done for the income approach also gave us strong
arguments in the course of this technology transfer operation
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Practical example : software valuation

Outcome of the valuation process
Outcomes of this process are positive

However, technical difficulties and time-to-market issues were

underestimated by project team

As exposed previously in this document, the valuation date is an important

factor, therefore our valuation results needed updates (raised costs, evolving
market, )

Fortunately, the technology transfer operation can now be considered as a

success (and valuation played a key role in this)

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Outcome of this process

Plans for the future?

This process, based on several best practices, will be upgraded

A tool is actually under creation (excel sheet), which will facilitate the
various calculation and parameterisation needed for each approaches

A separate useful document (under creation) relates to the choiceimpacting factors for valuation methods based on information
availability (list of criteria related to technology, legal, organizational and
market and how their characteristics could favour the choice of a given
method)

Finally, our income approach model is based on endogenous royalty (or

income) increasing or decreasing factors. Such factors (i.e. parameters)
need to be developed further in order to be more representative of free
and open source software licensing issues

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Suggested Readings
Codebook links
Valuation Tudor IP Management
Other readings
ISO/DIS 10668 - Brand valuation - Basic requirements for methods of
monetary brand valuation
http://www.iso.org/iso/catalogue_detail.htm?csnumber=46032

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