Valuation Tool

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Valuation Tool

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

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