IP Valuation


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Beyond specialized IP law practices, business, commercial, tax and estate practioners are increasingly involved in identifying, protecting, applying, and defending intangible assets owned by clients.

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IP Valuation

  1. 1. IP Valuation <br />September, 2011<br />1<br />CONSOR Intellectual Asset Management<br />
  2. 2. Why IP Valuation?<br />2<br />Beyond specialized IP law practices, <br />business, commercial, tax and estate practitioners <br />Increasingly involved in identifying, protecting, applying, and defending intangible assets owned by clients.<br />Context<br />Purpose<br />Value to whom?<br />How much value?<br />How and when does value change?<br />Buy, sell or transfer <br />Disputed ownership<br />Improve performance <br />Collateralization<br />
  3. 3. What is IP?<br />3<br />Intellectual Property vs. Intangible Assets<br />Bundles of IP and IA Assets<br />
  4. 4. Context: Property Types<br />4<br />Intangible Assets<br />Intellectual Properties<br />Customer & Vendor Relationships<br />Data Bases<br />Patents<br />Trademarks<br />Proprietary Systems<br />Internet Assets<br />Copyrights<br />Trade Secrets<br />IA vs. IP: Commercialized Separate from Other Assets<br />
  5. 5. IP Property Types<br />5<br />Bundles of Intangible Assets (IA), <br />each contains Intellectual Properties (IP)<br />Marketing<br />Relationship (Customer / Supplier)<br />Marks, brands, names, domains<br />Trade-dress, packaging, logos<br />Non-competes, key-person<br />Customer / Supplier relationships <br />Distribution networks<br />Order backlog<br />Technology<br />Contract<br />Technologies, know-how, systems, methods<br />Patents, software, recipes, content, databases<br />License / royalty, lease, franchise<br />Permits, use rights, broadcast rights<br />
  6. 6. Valuation Methodologies<br />6<br />Income<br />Market<br />Cost<br />Economic principal of substitution<br />Measures expense required to replace<br />Neglects future benefit<br />Present value of future economic benefit<br />Requires projections and a risk assessment<br />Requires allocation of benefit specific to the asset<br />Value based on price of similar assets<br />Requires suitable comparable assets<br />Description<br />Replication / replacement feasible<br />Benchmarking <br />DCF<br />Relief from Royalty<br />Comparable transactions<br />Benchmarking<br />Application<br />Valuation as Art and Science<br />
  7. 7. Valuation Tools of the Trade<br />7<br />The “Science” of Valuation<br />Discounted Cash Flow Models<br />Comparable Valuation Ratios<br />Replacement Cost<br />Relief from Royalty<br />Allocation / Excess Earnings<br />Option Models<br />Proprietary Approaches<br />
  8. 8. Changing Valuation Terminology<br />8<br />Level of Value<br />Value Definitions<br />Fair Market Value<br />Fair Value<br />Strategic Value<br />Liquidation Value<br />MVIC<br />= Assets + Liabilities<br />MVE<br />= Equity Ownership<br />Minority Interests<br />Who’s Setting Standards?<br />AICPA, ASA, ISO, NACVA, IRS, Courts, FASB, LESI, and more<br />Defining the Assignment to Avoid “Bad Art” <br />
  9. 9. Case: Improper Use of a Character<br />9<br />Background<br />Defendants used a character to promote products outside of the permitted terms of agreement with IP owner<br />Financial data from the defendants unavailable<br />Multiple methodologies applied<br />Income approach calculation yields different value than market and cost approaches<br />
  10. 10. Case: Improper Use of a Character<br />10<br />Case Take-away: Context is Key<br />
  11. 11. 11<br />A more complex case showing <br />the importance of Context, and <br />the importance of identifying IP<br />
  12. 12. Case: Identifying IP<br />12<br />Client assists municipal agencies issue bonds for public interest projects (a Public Private Partnership)<br />Client has achieved substantial profits for several years<br />Key competitor is a state-run agency<br />State accuses client of gouging the parties it serves<br />Has Client developed IP that justifies the excess profits? <br />
  13. 13. Case: Identifying IP<br />13<br />
  14. 14. Case: Identifying IP<br />14<br />We can see IP exists . . . <br />What are the key types of IP Assets?<br />IA at the CLIENT<br />Proprietary systems (some could be commercialized)<br />Proprietary methods<br />Relationships / key people (can’t be commercialized)<br />History / Longevity / 1st to Market (can’t be commercialized)<br />Case Take-away: Both IP and IA Contribute to Value<br />
  15. 15. Value Constraints<br />15<br />Present Value of Expected Future Benefit<br />Intangible Assets<br />Brand / Trade Names<br />Intellectual Properties<br />Value of Business<br />=<br />=<br />=<br />Intangible Assets<br />Tangible Assets<br />Tangible Assets<br />Could a company’s IP assets exceed the market value of the business?<br />Context: Fair Market Value (transaction did occur)<br />Context Implication: Value driven by expected future benefits<br />
  16. 16. Case: Impact of Context<br />16<br />Could a company’s IP assets exceed the market value of the business?<br />Frequent Context for IP Valuation: Purchase Price Allocation (FAS 141/142)<br />Purchase Price Creates Goodwill<br />What Portion of the Acquired Goodwill should be allocated to IP?<br />What are the components of the IP Allocation?<br />
  17. 17. Can Value of IP > MVIC?<br />17<br />Context Drives the Science<br />Value of IP cannot exceed MVIC in a purchase price allocation<br />Value of each IP = PV of future benefit each IP provides to Company’s cash flow<br />Tools / Science<br />Forecast cash flows by product<br />Quantify the interaction of IP Assets and their contribution to earnings<br />Case Take-away: <br />Context is key / Context Can Be Forced on the Value Analyst<br />
  18. 18. What if the Context Changes?<br />18<br />What if we don’t have a completed transaction between <br />a wiling buyer and a willing seller?<br />Frequent Contexts<br />Infringement Damages<br />Licensing / Endorsement<br />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)<br />Licensing: requires both parties understand and estimate the present value of future economic commitments (without the benefit of an existing arms-length transaction)<br />
  19. 19. What if the Context Changes?<br />19<br />What if we don’t have a completed transaction between <br />a wiling buyer and a willing seller?<br />IP Valuation Methodologies<br />Comparable Transactions<br />Relief from Royalty<br />Discount Future Benefit<br />Replacement Cost<br />All these approaches construct a hypothetical agreement between IP Owner and IP User<br />Crafting the Hypothetical Agreement Requires Art and Science <br />
  20. 20. Hypothetical Agreements<br />20<br />No More Rules of Thumb<br />Replacing Rules of Thumb<br />Uniloc USA v. Microsoft Corp: applicable specifically to IP analysis <br />End of the 25% rule = “End of the unsupported conclusion”<br />Averages & Surveys as the lemming’s rule of thumb<br />If it’s a universal norm, it can’t meet the criteria for comparables<br />Licensing agreement = contractual financial agreement<br />Commitments can and do take many forms<br />Hypothetical agreements must reflect their real-world counterparts<br />This Shouldn’t be Shocking<br />
  21. 21. Reflecting Real-world Complexity?<br />21<br />A Typical Relief From Royalty Calculation<br />Did Consider . . . <br />Forecast benefit (sales, term)<br />Industry dynamics (rate)<br />Risk assessment<br />Assumed . . . <br />Constant sales<br />Industry average royalty rate <br />No changes during term<br />
  22. 22. Case: Alternative Royalty Rate Analyses<br />22<br />Value of trademark and related brand assets to a partner business?<br />Method Applied: PV of license-derived economic benefits<br />Subject IP did not resemble comparable IP transactions<br />Parties had a standing relationship<br />Ranges observed in Comparable Transactions<br />
  23. 23. Case: Alternative Royalty Rate Analyses<br />23<br />Royalty Rate Build-up Method: BVEq<br />BVEQ= CBV + (IVE1 + IVE2 + …. + IVEN)<br />Surveys and Comparable Transactions are not The Only Tools Available<br />
  24. 24. Case: Reflecting Reality<br />24<br />Take-away: “Hypothetical Negotiation” Drives Greater Analytical Burden<br />
  25. 25. When Valuation Issues Arise?<br />25<br />
  26. 26. The Valuation Answer<br />26<br />Reconcile results from multiple approaches<br />Reconcile the calculations to the context<br />Context + Time = Value<br />There Are No Valuation Answers: Only Good Choices<br />
  27. 27. 27<br />Handouts<br />Law 360 on Rules of Thumb<br />Considerations for Hypothetical Negotiations<br />20 Licensing Structure Alternatives<br />Criteria for Comparable Transactions<br />
  28. 28. 28<br />Discussion<br />
  29. 29. CONSOR’s Services<br />29<br />www.consor.com<br />858 454 9091<br />IP Valuation<br />IP Litigation Support<br />Valuing patents, trademarks, copyrights, trade secrets, celebrity rights, and technology<br />Helping businesses understand the value of their IP<br />Valuation for transactions, tax purposes, litigation, licensing deals, and more<br />Assisting attorneys with damage calculation parameters & case strategy<br />Proven success as expert witnesses<br />Economic damages in litigation<br />Federal, state & international experience<br />Arbitration, and mediation <br />Licensing Consulting<br />IP Transactions<br />Assisting clients in maximizing the licensing value of their IP assets<br />Develop licensing strategies, execute, negotiate license agreements<br />Licensing experts in litigation<br />Evaluate financial and economic commitments of a potential transaction<br />Maximize the value of bankrupt assets<br />Identify valuable IP in bankruptcy<br />Market and sale of bankrupt IP assets<br />Value and dispose of intellectual property<br />