This document discusses intellectual property (IP) valuation. It notes that IP valuation is important for various contexts like transactions, taxation, disputes, and licensing. Different types of IP and intangible assets are identified. Common valuation methodologies are outlined including income, market, and cost approaches. Hypothetical licensing agreements are often constructed since real agreements may not exist. The document emphasizes that context is key in valuation and affects which tools and approaches are appropriate. It also provides examples of cases where different analyses were needed to reflect the specific context.
1. IP Valuation September, 2011 1 CONSOR Intellectual Asset Management
2. Why IP Valuation? 2 Beyond specialized IP law practices, business, commercial, tax and estate practitioners Increasingly involved in identifying, protecting, applying, and defending intangible assets owned by clients. Context Purpose Value to whom? How much value? How and when does value change? Buy, sell or transfer Disputed ownership Improve performance Collateralization
3. What is IP? 3 Intellectual Property vs. Intangible Assets Bundles of IP and IA Assets
4. Context: Property Types 4 Intangible Assets Intellectual Properties Customer & Vendor Relationships Data Bases Patents Trademarks Proprietary Systems Internet Assets Copyrights Trade Secrets IA vs. IP: Commercialized Separate from Other Assets
5. IP Property Types 5 Bundles of Intangible Assets (IA), each contains Intellectual Properties (IP) Marketing Relationship (Customer / Supplier) Marks, brands, names, domains Trade-dress, packaging, logos Non-competes, key-person Customer / Supplier relationships Distribution networks Order backlog Technology Contract Technologies, know-how, systems, methods Patents, software, recipes, content, databases License / royalty, lease, franchise Permits, use rights, broadcast rights
6. Valuation Methodologies 6 Income Market Cost Economic principal of substitution Measures expense required to replace Neglects future benefit Present value of future economic benefit Requires projections and a risk assessment Requires allocation of benefit specific to the asset Value based on price of similar assets Requires suitable comparable assets Description Replication / replacement feasible Benchmarking DCF Relief from Royalty Comparable transactions Benchmarking Application Valuation as Art and Science
7. Valuation Tools of the Trade 7 The “Science” of Valuation Discounted Cash Flow Models Comparable Valuation Ratios Replacement Cost Relief from Royalty Allocation / Excess Earnings Option Models Proprietary Approaches
8. Changing Valuation Terminology 8 Level of Value Value Definitions Fair Market Value Fair Value Strategic Value Liquidation Value MVIC = Assets + Liabilities MVE = Equity Ownership Minority Interests Who’s Setting Standards? AICPA, ASA, ISO, NACVA, IRS, Courts, FASB, LESI, and more Defining the Assignment to Avoid “Bad Art”
9. Case: Improper Use of a Character 9 Background Defendants used a character to promote products outside of the permitted terms of agreement with IP owner Financial data from the defendants unavailable Multiple methodologies applied Income approach calculation yields different value than market and cost approaches
11. 11 A more complex case showing the importance of Context, and the importance of identifying IP
12. Case: Identifying IP 12 Client assists municipal agencies issue bonds for public interest projects (a Public Private Partnership) Client has achieved substantial profits for several years Key competitor is a state-run agency State accuses client of gouging the parties it serves Has Client developed IP that justifies the excess profits?
14. Case: Identifying IP 14 We can see IP exists . . . What are the key types of IP Assets? IA at the CLIENT Proprietary systems (some could be commercialized) Proprietary methods Relationships / key people (can’t be commercialized) History / Longevity / 1st to Market (can’t be commercialized) Case Take-away: Both IP and IA Contribute to Value
15. Value Constraints 15 Present Value of Expected Future Benefit Intangible Assets Brand / Trade Names Intellectual Properties Value of Business = = = Intangible Assets Tangible Assets Tangible Assets Could a company’s IP assets exceed the market value of the business? Context: Fair Market Value (transaction did occur) Context Implication: Value driven by expected future benefits
16. Case: Impact of Context 16 Could a company’s IP assets exceed the market value of the business? Frequent Context for IP Valuation: Purchase Price Allocation (FAS 141/142) Purchase Price Creates Goodwill What Portion of the Acquired Goodwill should be allocated to IP? What are the components of the IP Allocation?
17. Can Value of IP > MVIC? 17 Context Drives the Science Value of IP cannot exceed MVIC in a purchase price allocation Value of each IP = PV of future benefit each IP provides to Company’s cash flow Tools / Science Forecast cash flows by product Quantify the interaction of IP Assets and their contribution to earnings Case Take-away: Context is key / Context Can Be Forced on the Value Analyst
18. What if the Context Changes? 18 What if we don’t have a completed transaction between a wiling buyer and a willing seller? Frequent Contexts Infringement Damages Licensing / Endorsement Damage Calculations: require application of traditional valuation methodologies to determine value of economic benefits lost, or not achieved (often when an arm’s length transaction would never have occurred) Licensing: requires both parties understand and estimate the present value of future economic commitments (without the benefit of an existing arms-length transaction)
19. What if the Context Changes? 19 What if we don’t have a completed transaction between a wiling buyer and a willing seller? IP Valuation Methodologies Comparable Transactions Relief from Royalty Discount Future Benefit Replacement Cost All these approaches construct a hypothetical agreement between IP Owner and IP User Crafting the Hypothetical Agreement Requires Art and Science
20. Hypothetical Agreements 20 No More Rules of Thumb Replacing Rules of Thumb Uniloc USA v. Microsoft Corp: applicable specifically to IP analysis End of the 25% rule = “End of the unsupported conclusion” Averages & Surveys as the lemming’s rule of thumb If it’s a universal norm, it can’t meet the criteria for comparables Licensing agreement = contractual financial agreement Commitments can and do take many forms Hypothetical agreements must reflect their real-world counterparts This Shouldn’t be Shocking
21. Reflecting Real-world Complexity? 21 A Typical Relief From Royalty Calculation Did Consider . . . Forecast benefit (sales, term) Industry dynamics (rate) Risk assessment Assumed . . . Constant sales Industry average royalty rate No changes during term
22. Case: Alternative Royalty Rate Analyses 22 Value of trademark and related brand assets to a partner business? Method Applied: PV of license-derived economic benefits Subject IP did not resemble comparable IP transactions Parties had a standing relationship Ranges observed in Comparable Transactions
23. Case: Alternative Royalty Rate Analyses 23 Royalty Rate Build-up Method: BVEq BVEQ= CBV + (IVE1 + IVE2 + …. + IVEN) Surveys and Comparable Transactions are not The Only Tools Available
26. The Valuation Answer 26 Reconcile results from multiple approaches Reconcile the calculations to the context Context + Time = Value There Are No Valuation Answers: Only Good Choices
27. 27 Handouts Law 360 on Rules of Thumb Considerations for Hypothetical Negotiations 20 Licensing Structure Alternatives Criteria for Comparable Transactions
29. CONSOR’s Services 29 www.consor.com 858 454 9091 IP Valuation IP Litigation Support Valuing patents, trademarks, copyrights, trade secrets, celebrity rights, and technology Helping businesses understand the value of their IP Valuation for transactions, tax purposes, litigation, licensing deals, and more Assisting attorneys with damage calculation parameters & case strategy Proven success as expert witnesses Economic damages in litigation Federal, state & international experience Arbitration, and mediation Licensing Consulting IP Transactions Assisting clients in maximizing the licensing value of their IP assets Develop licensing strategies, execute, negotiate license agreements Licensing experts in litigation Evaluate financial and economic commitments of a potential transaction Maximize the value of bankrupt assets Identify valuable IP in bankruptcy Market and sale of bankrupt IP assets Value and dispose of intellectual property
