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Key concepts in intellectual property valuation nevium 2013
1. 1
Key
Concepts
in
Intellectual
Property
Valua4on
March
2013
Brian Buss, CFA
Doug Bania, CLP
2. Introduc4on
Our
View
of
IP
The
Why,
What
&
How
of
IP
Valua4on
Key
Concepts
of
IP
Analysis
IP
Analysis
Example
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 Chair-elect.
• Certified Licensing Professional (CLP)
• MA in Television, Film and New Media Production;
BA in Cinema
• Over 11 years experience in intellectual property
advisory and management
Doug Bania
Complementary
skills
and
experience
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. 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
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. 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. 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
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
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. 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
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. 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. 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
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. 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
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
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
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
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
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. 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
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Intellectual
Property
Solu4ons
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