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Valuation Tool


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  • 1. FITT (Fostering Interregional Exchange in ICT Technology Transfer)
  • 2. Practice in general
    • The objective of this case is to expose an excel-based worksheet (the Tool) designed to support valuation processes
    • This Tool aims at assisting “quantitative” valuation methods
      • Facilitates valuation processes
      • Helps choosing among a quantitative valuation method
        • Cost Approach
        • Market Approach
        • Income Approach
    • Tool was designed for internal use at Tudor
      • Tool is a work in progress, aimed at being optimized through further use experience
    • Tool needs adaptation on a case-by case basis
  • 3. Valuation methods used in Tool
    • Cost Approach
      • Measures the value of an intangible asset by taking into account all relevant costs invested or 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 favored under high uncertainty and limited information
  • 4. Valuation methods used in Tool
    • 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
    • Income Approach
      • Measures 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, …
  • 5. The Tool – Part 1 (Choosing a valuation method)
        • Various parameters help choosing among valuation methods
        • Maturity of technology
          • Based on the notion of the technology life cycle. The maturity of a technology impacts the amount of products based on such technology available on markets at the time of valuation.
          • Strong maturity is needed for market approaches.
        • Level of novelty
          • Is to be considered strictly for the considered market . An asset under valuation can be old from a technological standpoint, but new for a given market.
          • High level of novelty favor cost and income approaches.
  • 6.
        • Nature of technology
          • Either discrete (asset usable solely) or complex, meaning that the use of such technology relies on the necessity to use other dependant technologies.
          • Complex technologies favor cost and income approaches.
        • Substitutable technologies
          • Availability of other technologies that can be use in order to replace an existing one with no or minimal loss of utility
          • For replacement costs, technologies need to be substituable.
        • Sustainaible technologies
          • Implies that they have a potential for a long life cycle remaining
          • Sustainability favors income approaches.
    The Tool – Part 1 (Choosing a valuation method)
  • 7. The Tool – Part 1 (factors impacting royalty and risks)
    • Impacting factors (which need to be analyzed prior to valuation activity)
          • Legal-focused criterias
            • Freedom to operate (based on third party IP)
            • Level of Protection granted by IPR (level of appropriability)
          • Internal and organisational-focused criterias
          • Nature of the value proposal (understanding of how value will be created)
          • Accounting rules and reporting methods (if important)
          • External and market-related criterias
            • Market risks (strong or weak – known or unclear)
            • Comparable markets (existing or not)
            • Consumer behaviour (understood and “rationnal” or not)
  • 8. Historic Cost Approach
    • Inflation and depreciation should be managed externally
  • 9. Market Approach
    • Market price for comparable technology/asset (known price)
      • Example : 1 M€
    • Advantage induced by this comparable technology/asset
      • Example : 20% productivity gain
    • Number of years of technology/asset exploitation on market + inflation rate
    • Current value of comparable technology
      • 1M€ x (1- 0,03)^5
    • Valuated technology
    • Gain for the valuated technology
      • Example : valuated technology permits a 30% productivity gain
    • Value of technology
      • 20% gain = 858k€
      • 30% gain = 1,288k€ (50% increase)
  • 10. Income Approach
  • 11. Income Approach
    • Discount Rates calculation
      • Need WACC info (specific for market/technology  IT = +/-8%)
  • 12. Income Approach
      • Initial need for income Approach = Sales Plan
  • 13. Income Approach
      • Calculation of actualized net present value
  • 14. Income Approach
      • Value range +/- 20% of NPV