IP Valuation

Why should IP be integrated in

your business plans?
If creating IP, take steps for protecting,
managing and enforcing it, to get best
possible commercial results

If using IP belonging to others, consider

buying it or acquiring rights to use it to avoid
dispute and litigation

According to a PricewaterhouseCoopers’
analysis of US market, intangible assets and
goodwill constituted 74% of avg. purchase
price of acquired companies in 2003, with
22% being Intangible Assets
Intangible assets (IA) are the IPRs owned by
the company including licenses, contracts,
non-compete agreements and so on

Legal protection of IA turns them into

exclusive property rights which can be
commercialized and also gives competitive
edge
 IP as a business Asset
Use IP protection as an investment.
Market value of a company based on
 Assets
 current business operations
 expectations of future profits.
The last constitutes IP assets
Only legally protected rights have value
Enhancement of market value
Generates income by licensing, sale or
commercialization of IP protected products
Value of company increases in the eyes of
investors and financing institutions
In the event of a sale, merger or acquisition
IP assets raise value
A good IP portfolio a defensive mechanism
against potential competition
Audit IP assets – which ones to acquire and
maintain, license, enforce, use as a collateral
or security for debt finance
 Nature of IP

Copyright/Related Rights
protects reproduction &
performance in arts/software
Industrial Design
Patents
protects Only IP that
look of products,
protect packaging, aesthetics
generates
products, business direct cash flows
processes
in a commercial
Trade Secrets transaction
protect business plans,
know how, is considered
Mark/
client portfolio,
Geographical Indication tacit knowledge,
protects, logo, processes
slogans, symbols
Protection against Unfair Competition
 IP is an intangible asset, ...

Knowledge Content
Transferability Background of users &
IP is transferable to a new context determine relevance
or similar business context of IP to business

Perishability Non Rivalry in

Nature
Over time IP may Consumption
of IP
become outdated, IP can be used
e.g. technology cycles simultaneously
by different people
without diminishing
in its worth
Spontaneity
Successful IP creation is Partial Excludability
risky since there is a creative IP guarantees a firm exclusivity and
& a business element to it freedom to operate in the market
… which Accounting finds difficult to
grasp
Rationale behind Accounting Impact on Type of Language
developed for IP
• Historically evolved to
report tangible • Silence about a lot of a
assets/liabilities firm’s IP due to inherent
• Quantitative stock of definitions and
performance assumptions in
accounting
• Documentation of past
financial position
• Internally and externally
• Factual, precise, objective,
generated IP is treated
comparable information
differently
• Determines perception of a
firm’s management and other
• Goodwill
market participants
 How Accounting Concepts Impact Business

Concept Impact
Internally Generated IP The same IP may be
is immediately expensed, perceived to be
Acquired IP is valued at its acquisition cost, worth nothing or
amortized or subject to an impairment test 100 Mn $
Implies a benchmark,
Fair value: “Amount at which an asset could
yet worth of IP
be bought or sold in a current transaction
depends also on context
between 2 willing parties, other than a
& background
liquidation.”
Much IP won’t
Intangible Asset: “… identifiable, controlled by
qualify since it has
an enterprise as result of past events & should
an indirect impact
generate future economic benefits for the firm.”
on cash flows
Goodwill: “price a market participant is ready to
Difficult to make
pay in excess of the value of a firm’s tangible
worth of IP explicit &
assets.”
compare Goodwill
of different firms
 Advantages of Reporting IP

F M
• Communicates the value of IP to investors
O A
• Shows what IP the company owns
R N
• Puts a value to the IP
A
• Explains how the IP relates to business segments
G
E F I
R O N
S R V
• Get information on how IP drives growth E
• Receive adequate inputs for earnings/sales forecasts S
• Can better estimate risks/revenues of an investment T
• Can better understand the nature of a business O
• Increases predictability while decreasing volatility R
S
The IP Reporting Process

Create IP
Build IP ownership
Create Understand Report Generate
Business IP IP IP Superior
Culture Ownership Ownership Results

• Align IP • Ensure • Audit IP • Use

portfolio market $$$
a reporting or
to overall position • Set system
business through IP ¥¥¥
ownership in demonstrating
strategy ownership or
correlation to the value of
£££
expected IP to your
• Explain • Establish an results business
to all in enabling IP
the firm policy and • Understand
why IP environment legal scope
matters of IP
 The story of Apple iPod
- smart use of IP strategies to gain control
over market
Coke, Microsoft, Intel, IBM, McDonald’s –
priceless brand value
In the last ten years - smart companies
have effectively used the IP system to
create, extract or leverage the value of
their intangible assets
Intellectual capital is recognized as the most
important asset of many of the world’s largest
and most powerful companies
It is the foundation for the market dominance
and continuing profitability of leading
corporations
It is often the key objective in mergers and
acquisitions
The role of intellectual property rights
(IPRs) and intangible assets in business is
insufficiently understood
Accounting standards are generally not
helpful in representing the worth of IPRs in
company accounts
IPRs are often under-valued, under-
managed or under-exploited
 Despite the importance and complexity of IPRs –
a neglected area
Questions to be answered:
 What are the IPRs used in the business?
 What is their value (and hence level of risk)?
 Who owns it (could I sue or could someone sue
me)?
 How may it be better exploited (e.g. licensing in
or out of technology)?
 At what level do I need to insure the IPR risk?
A key factor – company’s success or
failure – how effectively it exploits its
intellectual capital and values risks
Management need to know the value of
IPs as much as they know the value of
tangible assets
Because business managers need to
know the value of all assets under their
control and stewardship
 What is Valuation
Valuation is bringing together of the
economic concept of value and the legal
concept of property
IP valuation – value of a thing in a
particular place, at a particular time, in
particular circumstances
Failure to take into account these factors
will make IP valuation meaningless
 Value concepts
Owner value – Properietor’s view of value
if he were to be deprived of it
Market value – Assumption if comparable
property has fetched a certain price, then
the subject property will realize a price
near to it
Tax value – different countries have
different tax laws
 Fair Value
The concept develops from the desire to
be equitable to both parties
It recognizes that the transaction is not in
the open market and that the vendor and
purchaser have been brought together in a
legally binding manner
Neither of them is under any compulsion
to act and both have reasonable
knowledge of all relevant facts
 Why undertake Valuation of IP
Assets
It helps the IP owner to
 Use
 Protect
 Insure
 Sell
 Leverage
 Exchange
• IP assets in a most cost effective way
 Situations
Licensing

 Before licensing an IP – accurately know

its value
 Helps the Licensor to put a value
 Helps the Licensee to compare with
competitors
 Mergers & Acquisitions

 Increasing contribution of Intangible Assets to

overall market value of enterprises
 Each party submits to the other (after signing
CA/NDA) an IP Due Diligence Report
• Cost Saving
 Some IPs – prohibitively expensive to
maintain
 Some maybe below a benchmark value
 Cost – benefit analysis – whether to
maintain, license or allow it to lapse
 Donation of IP Assets
 Some countries have tax benefits attached
to donations to non-profit organizations,
like Universities
 If an IP asset no value to a company –
does not mean valueless
 It might need further development
 It might suit the NPO
 To reap tax benefit – value IP
 Sale or purchase of IP Asset
 IP assets can be identified, segregated
and totally decoupled from the rest of the
assets
 Can be sold and bought independently of
each other
 Good to know a fair value of the asset
 Helps in taking an informed decision by
the parties involved
• Joint Venture/Strategic Alliance
 To determine the share of each enterprise
in a new entity
Litigation Support
 Substantial increase in IP infringement
cases
 Analyze the damage caused and estimate
the value that the owner should be paid
 Knowledge of value crucial in determining
the course of action to be taken by the
owner
• Collateralization and Securitization
 Banks in some countries have started
accepting IP assets as collaterals for giving
loans
 Venture Capitalists also accept IP assets as
security for a start up venture
 Securitization
 Refers to pooling of revenue – generating assets
and issuing securities backed by them
 Can raise a bank loan without loosing control
over securitized assets
 With more reasonable terms – including
payment over a longer period of time
 E.g. Securitization based on the future music
royalty streams of a portfolio of songs of David
Bowie
 How is valuation done ?
It is not like finding the price of a standardized
products like a car or a cycle
Local newspaper or a local dealer will not tell the
price
Uniqueness – image that the trademark is
carrying or the technological solutions that the
patent is protecting
Fair Market value – Depends on various inputs
like competitive environment and the existence
of alternative methodologies
Parameters for Assisting Valuation
Competitiveness
 An idea capable of IP registration – not
immune to competition
 Alternate methods of achieving the same
results – patent
 Competition among brands
 Competition from generic manufacturers
 Quality of Provenance – The source of IP has
a bearing on its ultimate value
 A device, for e.g., which considerably reduces
CO2 emissions in an industry will have
considerable value in the market
 In one case this device is made by an
established company – they already have
resources to manufacture, distribution network
and goodwill in the market
 In the second case – by a lone inventor in his
workshop – will require considerable inputs for
both manufacturing and distribution
 The value will be more in the former case
 Transactional
 The lone inventor decides to license to the
company in the first case
 The price obtained by the inventor would
probably be higher than if he marketed himself
 This will be lower than value to the company
 E.g. If Bill Gates were to have licensed DOS
exclusively to IBM – IBM would have made more
money
 The aggregate value of Windows/DOS would
have been lower
• Intent
 Withhold a new technology – increase the
life of existing technology
 To restrict competition – prevent
technology to enter market
 If a big organization – cannot be forced
into a sale of its IP or no commercial
strategy to change its IP policy – a
valuation not appropriate
 Function
 A patent used for protecting the central
concept
 Peripheral patents to protect the basic one
– only have value along with the core
patent
 The value of these patents will be less
than those of the others
 Valuation Methodologies
Possible only if such assets can be
specifically identified and clearly
segregated from other assets
IP assets are and will always remain hard
to appraise
It is as much art as science
It determines the monitory value of an IP
asset and is based on existing methods
used in tangible property
 Income Approach
Focuses on the consideration of the income
producing capability of the IP asset
Relevant for patents, trademarks and copyrights
It estimates the present value of a stream of
revenue that would result from the use of
underlying IP asset during its economic life
Economic life may differ from duration of IP
protection
This is the most popular method
 Five parameters to be kept in mind:
 Revenue or income associated with the use of
the IP
 Expected growth characteristics of the identified
revenue or income
 Expected duration of the revenue or income
 Risk associated with generating the estimates
of revenue or income
 The proportion of the revenue or income that is
attributable to the subject of IP
 Producing an accurate forecast of revenue
depends on:
 Competitive & economic environment in place
during the appropriate timeframe for the
valuation
 Need to accurately predict property’s remaining
economic life
 Forecast not beyond a patent’s life
 2-3 life expectancy span for a trademark which
has been in use for 25 years is conservative
 Income Approach - Relief from
Royalty Method
Company determines the royalty rate of an IP
asset it currently holds, if it were to buy from
someone else
Having determined this, it goes on to calculate
the amount of money, in the present value, that
it was relieved from paying – if it had to buy or
license the IP asset
Most convenient method – shortcomings – may
or may not provide true value
 Income Approach - Incremental
Income Method
Discounted Approach Incremental Income
Approach
 Forecasting year-by-year future streams of
incremental income – resulting from use of the
IP asset – and then discounting those into
present value
 Trademarks – segregating the additional gross
income from increased sales revenue due to the
trademark
 Patent – segregating the savings from expense
reductions in operations due that patent that
reduces material usage
 Income Approach - Incremental
Income Method
Capitalization of Incremental Income
approach
 Focuses on actual income generated
through the use of the IP asset
 Uses such information as an indicator of
future potential growth
 The Market Approach
It is based on comparing the value of sales
of earlier similar/comparable IP assets in
the market
To make such comparisons, there must
be:
 An active public market
 An exchange of comparable properties
 Easy access to price information
 The Market Approach
A variant of this approach
 Uses a `standard’ or `established’ range of
royalty rates in that sector
 This approach is rarely used because
there is rarely an active market in which
relevant information is readily available
 Normally used to check accuracy of other
methods
 Cost Approach
Seeks to establish the value by calculating the
cost that a company would incur if it were to
develop a similar asset either internally or
acquire externally
Reproduction Cost – level of expenditures
needed to reproduce exactly the same asset –
used for litigations
Replacement Cost – measures the
expenditures necessary to develop a device of
similar utility or determine a target price prior to
negotiations or replace the existing intangibles
There are many practical challenges in
determining what costs to include or exclude
Costs include – employee costs, overhead and
management costs, labor costs, opportunity
costs – how other costs have been ignored to
develop this IP
Possibility of obsolescence
This approach useful for early-stage technology
No economic activity review
Main drawback – it does not recognize any
economic benefits associated with market
activity – used as a supplement to income
approach
 International valuation Standards
The valuation process necessitates:
 Gathering information
 Understanding economy
 Industry
 Specific Business that directly affects the value
of Intellectual Property
 Such information may be gathered from
external/internal sources
 Information converted to financial models
Uniform Standards of Professional Appraisal
Practice (USPAP)
International Valuation Standard Committee
(IVSC)
US Generally Accepted Accounting Principal
(GAAP)
International Financial Reporting Standards
(IFRS)
Financial Accounting Standards Board (FASB)
 Limitations of IPR Valuation
Depends upon the use of an interlocking
series of estimates, assumptions and
judgments
Highly limited as to accuracy of results
Accurate assessment in one field of IP
property – new ideas come up
Discomfort - dynamic nature of IP