Key Concepts in Intellectual Property Valuation - Nevium

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Key Concepts in Intellectual Property Valuation - Nevium

  1. 1. 1 Key  Concepts  in   Intellectual   Property    Valua4on       Brian Buss, CFA Doug Bania, CLP
  2. 2. Introduc4on   Our  View     of  IP   The  Why,  What   &  How  of  IP   Valua4on   Key  Concepts   of  IP  Analysis   IP  Analysis   Example  
  3. 3. Nevium Intellectual Property Solutions 3 Develops supportable financial and economic analyses for clients ranging from law firms to entrepreneurs to fortune 500 corporations to not-for-profit organizations. Brian applies his experience in finance, banking and valuation to value individual assets and bundles of intellectual properties, calculate damages in IP infringement disputes, and develop return on investment analyses to support strategic decisions. •  20 year career in Valuation, Financial Analysis, Banking •  Charted Financial Analyst (CFA) •  MBA (SDSU); BA in Biology and Economics (Claremont McKenna College) •  Valuation and M&A experience on 5 continents Brian Buss Works closely with clients to develop licensing and monetization strategies for assets including trademarks, patents, brands, publicity rights and copyrights. Using his experience analyzing and structuring intellectual property transactions, Doug serves clients as an expert witness, negotiating transactions and in implementing IP strategies. Doug is an active member of San Diego’s Licensing Executive Society, currently serving as the Chapter Chair. •  Certified Licensing Professional (CLP) •  MA in Television, Film and New Media Production; BA in Cinema •  Over 12 years experience in intellectual property advisory and management Doug Bania Complementary  skills  and  experience  
  4. 4. 4 Responsibility ChainComplementary Views on IP A Financial and Economic View of IP IP Development and Ownership IP Business Management IP Legal Management
  5. 5. 5 Responsibility ChainValuation Basics Art & Science . . . but not Magic Value = Present Value of Future Benefits Fair Market Value = price at which un- related parties would transact Valuation happens every day, only some valuations involve a formal analysis IP Valuation requires one more step compared to Business Valuation
  6. 6. How IP Contributes to Value 6 Descrip4on Economic  Benefits Monopoly Barrier  to  entry,   exclude  others   from  using •  Pricing  power   •  Greater  profit  margins Li4ga4on Seek  damages  if   others  use •  Li>ga>on  award                                                 (PV  of  award  less  costs)   •  Threat  of  li>ga>on                                       (force  “Monopoly”  or  “Permission”) Permission Ability  to  be   compensated   when  others  use •  Value  of  license                                         (PV  of  royal>es+fees  –  costs)   •  Value  if  sold Promo4on Signals  innova>on,   uniqueness,  source   of  origin  to   consumers •  Addi>onal  sales   •  Reduced  marke>ng   •  Incremental  margin Value Derived From the Economic Benefits Created
  7. 7. IP  Valua4on:   What  /  Why  /  How  
  8. 8. Why 8 Buying or selling Licensing Bankruptcy Build, buy or license IP portfolio alignment ROI, ROMI Our first question: “Why do you need the Asset valued?” Fair value reporting Purchase price allocation Impairment testing Estate transfers & contributions Transfer pricing Non-profit to for-profit Eminent domain Damages Valuation Strategy / Transactions Compliance Litigation Context  impacts  the  Analyst’s  approach  to   the  assignment    
  9. 9. What 9 Early on, All parties agree on what is being valued Our 2nd question: “Which assets will be valued?” Trademarks Copyrights Publicity Rights Patents Copyrights Trade Secrets Marketing Assets Technology Assets Domain Names Customer Lists Relationships Practices / Procedures Know-how / Research Test Results Relationships Practices / Procedures What other assets are related to the IP?
  10. 10. Valuation Approaches for Brand IP Description Information Required Cost Approach Amount a potential buyer would pay to replace or create an asset themself •  Historical Cost to develop the IP •  Amount spent to promote, maintain and support the IP •  Estimate of cost to replace or replicate (R&D expenses, corrective advertising, time and effort) Income Approach Present value of future economic benefits received from ownership of an asset •  Product-level earnings forecast •  Apportion profits from products using the IP •  Reasonable royalty rates & licensing compensation •  For damages: But-for and As-is forecasts Market Approach Value based on observed transactions involving comparable or similar assets •  Comparable transactions research •  Peer Group: market share, pricing strategy & results •  Similar forms of IP, IP used in similar context How Same  Approaches  as  Business  Valua4on  .  .  .          apply  as  many  methodologies  as  possible     10
  11. 11. Key  Concepts  
  12. 12. 12 Responsibility Chain The Intellectual Property& Products Profits People Resources Tangible Assets / Natural Resources Business and IP Valuation The Key in IP Valuation: Apportion profits to the IP IP depends on other assets and resources in order to generate economic benefits = Capital Resources Other IP & IA
  13. 13. 13 Responsibility Chain Present Value of Expected Future Benefits Value of Business = Intangible Assets = = Trademarks Copyrights Tangible Assets Intangible Assets Tangible Assets Concept 1: Apportionment IP amongst many assets used to generate “Economic Benefit” Value of Business > Value of IP Assets owned by the Business Patents
  14. 14. IP Marketplace Product Marketplace 14 Responsibility Chain Licensor Concept 2: Value for Whom Transaction requires benefit for multiple parties For Licensee Value = Revenue – Compensation Paid (often a Royalty) Licensee Customer For Licensor Value = Royalty – Cost to Develop & Own IP Compensation Product Revenue
  15. 15. 15 Responsibility ChainConcept 2: Value to Whom Both parties expected to benefit 0 1 2 3 4 5 Forecast Licensee Sales 1,000 1,300 1,495 1,645 1,727 1,761 Growth Rate 30% 15% 10% 5% 2% Annual Royalty Rate 8.0% 8.0% 8.0% 8.0% 8.0% For IP User (Licensee) Up-front payment (50) Annual Fee (5) (5) (5) (5) (5) Additional Profit Margin 15% 20% 15% 10% 5% Additional Profits - 195 299 247 173 88 % of Sales Royalty - (104) (120) (132) (138) (141) Total Benefits (50) 86 174 110 30 (58) Present Value @ 25% (50) 69 112 56 12 (19) Value of IP to Licensee 180 For IP Owner (Licensor) Up-front payment 50 Promotions Commitment (130) (150) (82) - - Promotions Commitment % 10% 10% 5% 0% 0% Annual Fee 5 5 5 5 5 % of Sales Royalty 104 120 132 138 141 Total Benefits 50 (21) (25) 54 143 146 Present Value @ 20% 50 (18) (17) 31 69 59 Value of IP to Licensor 174
  16. 16. Income Statement Revenues Gross Sales 1,000 100% Discounts 5 1% Net Revenue 995 100% Cost of Sales 450 45% Gross Profit 545 55% Operating Expenses Sales & Marketing 100 10% General & Admin 75 8% Research & Development 50 5% Depreciation 35 4% Other 15 2% Total OpEx 275 28% Operating Income 270 27% Other Income / (Expense) Interest, net (55) -6% Non-recurring (45) -5% Sale fo Assets 85 9% Total Other Income (15) -2% Pre-tax Income 285 29% Tax Expense (100) -10% Net Profit 185 19% Not all royalties are the same Concept 3: Royalty Rates Best for Licensor Best for Licensee Financial  Risk  to  Licensee   $ / Unit made $ / Unit Sold Gross Sales ($ invoiced) Gross Sales (Collections) Net Sales Gross Profits EBIT Net Profits Level of Benefit Drives the Royalty 16
  17. 17. Concept 3: Royalty Rates Licensor Activities Research  /   Develop   Design  &  Test   Regulatory  /   Approvals   Manufacture   Market   Distribute   Service   Adopt   Licensee Activities Reasonable Royalty considers: the level of benefit, and the allocation of roles Allocation of Roles Drive the Royalty 17
  18. 18. 18 Concept 4: Forecasting Future Benefits Asset Remaining Life (Years) Cash Flow ($) Asset Value ($) IP: Remaining Life, Cash Flow & Value •  IP and the products that use IP have life spans •  Benefits from the IP will grow, peak and then decline as other IP and other products take their place •  Companies can expect perpetual growth, IP cannot Guiding Concepts Total Contribution Patents IP: Relative contribution Trademarks & Other Intangibles Time Product Life Cycle Products & Businesses IP Remaining Life Business Revenues Benefit Today’s Products Products In-development Future Products
  19. 19. Damaging   Event   Time Valua>on  Date  /     Today   Economic Benefits Forecast Period But-For Results As-Is Results Historical Period Damages = lost earnings for past periods (section “A”), plus forecast periods (section “B”) A B As-Is and But-For Scenarios Concept 4: Forecasting Future Benefits 19
  20. 20. 20 Tie  the  forecast  to  the  facts   •  Market outlook •  Economic trends •  Peer group analysis •  Competitive product analysis •  Pricing and discounting history •  Pricing strategy •  Share of product portfolio •  Product life cycle stage •  Cost to clean or repair Building Benefit ForecastsThe Forecasts Concept 4: Forecasting Future Benefits
  21. 21. 21 Responsibility ChainConcept 5: Discounting Future Benefits WACC = WARR Rates from 15 – 30% are typical The Discounting Formula: •  FB = forecast benefits •  R = discount rate Two Key Concepts WACC = WAAR Principal of Substitution
  22. 22. One last element 22 Responsibility Chain Intellectual Property Valuation & Key Concepts Bringing it all together Why, What & How Apportionment Value for Whom Royalty Rates Discounting Forecasting Future Benefits
  23. 23. 23 Financial Performance: historical, trends, forecasts, ratios Timelines: chronologies, histories and event charts Market Share: market positions, market maps SWOT / Porters: identify forces shaping the business Scoring Analyses: confusion scores, comparable claims, brand strength scores Company Language Analysis: what competitive advantage the Company has claimed Surveys and Intercepts: consumer preference, confusion Royalty Rates: benchmarks, surveys and comparable transactions Best Practices: licensing and transaction practices as described in texts and guidebooks Tools for the Narrative Supportable analysis requires a cohesive narrative . . . and lots of tools Combine Concepts & Build the Narrative The Qualitative is as important as the Quantitative
  24. 24. A  Quick  Example  
  25. 25. 25 Responsibility Chain IP Assets& Products / Services Profits People Resources Tangible Assets / Natural Resources IP Valuation Two Steps: Determine Profits then Apportion Profits to the IP Asset An IP Asset Requires Other Resources Capital Resources Value of the IP Asset Simply . . . Forecast Profits x Apportionment = Discount Rate x Other IP & IA
  26. 26. 26 Responsibility ChainTrademark Valuation Example That’s all Value of Trademark Forecast Profits x Apportionment = $1,000 year 1 x = $150 year 1 PV of Future Benefit Apportionment Results Analysis Type Low High Website Analysis 5% 20% Company Language 15% 25% CUT 8% 12% Use % of Profits to IP 15% = $603 Why Value: Sale of trademark to un-related party
  27. 27. Questions to Start an Analysis 27 Buying, Selling & Licensing Is an earnings forecast or business plan available? Who else would use the Assets? Are there any outside claims to the Assets? Does the current owner of the Assets engage in any licensing? Tax & Compliance Which products rely on the Assets? How will use of the Assets change after the transfer? What are the key assets of the organization? Do records of cost to create/develop exist? Bankruptcy What is the reorganization plan? Which products rely on the Assets? What are the key assets of the organization? Litigation or Pre-litigation Are detailed accounting records available? Does the Asset owner engage in any licensing? How and where was the Asset used / infringed? Management, Planning & Strategy Is an earnings forecast or business plan available? Does the Asset owner engage in any licensing? Which products rely on the Assets? What are the key assets of the Organization?
  28. 28. 28 Nevium  Intellectual  Property  Solu4ons   www.nevium.com   858  255  4361   Managing intellectual property is key to maximizing value

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