Valuation • Due diligence for a transaction • Setting a sale price • Determine royalty rates • Defining a maximum offer • Securitization assessment • Transfer pricing among affiliates • Purchase price allocation on acquisition • Return on Investment assessment • Impairment testing (FASB / IFRS) • Use as collateral for a loan • Assess potential litigation risk/damages Why value IP?
Valuation • Shareholders • Licensees • Management • Tax authorities • Equity and debt markets • The media • Creditors • IP in-house counsel • IP litigators Who is interested?
Valuation • Inventory • Prioritize • Classify • Technology, marketing, content, operational • Define / research market(s) • Select methodology based on IP type, data available, purpose, timing, and budget • Financial/economic modeling • Sensitivity analysis • Report conclusions What is the process?
Valuation • Obvious • Trademarks, Patents, Copyrights • Less obvious • Slogans, Characters, Packaging • Obscure • Trade secrets, Non-compete agreements, Business methods, Knowledge bases Initial inventory types of IP
Valuation Intangible Assets Intellectual Property Data & Customer Knowledge & Vendor TRADE Bases Relations PATENTS MARKS COPY TRADE Internet Proprietary RIGHTS SECRETS Assets Software Classification
Valuation • Different according to purpose • Fair market value (FMV) refers to the value in an ideal market, and is most often used for tax-purposes and litigation. In the USA, it is based on the tax authority’s definition • Fair value (FV) is defined in a concrete situation and is most often used for financial reporting purposes following the guidelines of the FASB (USA) and IFRS Standard of value
Valuation • Fair market value (FMV): • The price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts. (IRS Pub. 526) • Fair value (FV): • The price that would be received to sell an asset in an orderly transaction between market participants at the measurement date price. (FASB ASC 820) • Orderly = not in liquidation, risk-adjusted • Market participants = independent, knowledgeable, willing Definitions
Valuation • Fundamental principle – Measure value by the net present value of the future economic benefits of owning the IP • Owners will only be willing to sell if the price is greater than their IP’s value as they perceive it • Buyers are only willing to purchase if the price is less than the value they anticipate getting from the IP • There is a market for IP if the owners’ prospects for value are less than what potential buyers forecast Methodology
Valuation • The Cost approach to valuation seeks to measure value by quantifying how much money would be required to replace the service capability of the IP asset • How much does it cost today to obtain IP with equivalent utility • Consider that utility today may be less than original (depreciation) • Original (historical) cost is irrelevant • Market value of IP is = current value of the service it provides • Example of application - software Valuation methods: Cost
Valuation • The Market approach directly measures value looking at what others in the market have judged it to be. For IP, its assumptions are not often satisfied: • Active market • Not enough transactions • Public market • Not enough knowledge of prices, availability • Comparability • IP is unique by definition • Time adjustments • Value changes over time • Example - Franchises Valuation methods: Market
Valuation • The Income approach considers the income producing capability of the asset. The value of IP can be measured by the present value of the net economic benefit to be received over its remaining useful life. • Amount and timing of income (net of expenses) requires forecasting the underlying business • Risk of achieving the income stream must be estimated • Apply net present value (discounting) technique • Examples – Licenses, patents, content contracts Valuation methods: Income
Valuation • Technology-specific methods are useful in special circumstances, but fall under either market or income approaches. • Tech-Factor – Measures the portion of a business unit’s overall market value that is attributable to the utilization of the underlying technology adjusting the NPV of the benefits by a series of qualitative factors reflecting the competitive environment • Real options approach – Extends consideration of flexibility (retained rights vs. implementation) and useful for un-commercialized technologies • Game theory – Specifically used for negotiations when the value of alternatives can be estimated Alternative methods: Technology
Valuation • Technology: Improved corn-oil extraction in Ethanol production • Client: Asset-based lender to the technology licensor • Standard of value: FMV and “Net orderly liquidation” • Patent portfolio: 7 US patents + 14 applications in 3 technology fields (oil separation, oil enhancement, protein separation) • Priority: Focus on issued patents in oil separation and enhancement • SWOT analysis: Regulations in Ethanol production require implementing new corn oil extraction techniques (S), industry specific/limited licensees (W), litigation, new regulation requirements (O), Larger competitors (T) Valuation example
Valuation • Methodology: Income approach, royalty income method. • Revenue forecast: Three scenarios (base, low, high) assuming different market penetration and success in litigation Example
Valuation • Discount rate: 31.7% • Risk-free rate (10-year treasury bonds) 1.65% • Equity risk premium (US markets) 6.14% • Industry Beta ( ) Industrial organic chemicals 1.02 • Size premium micro cap 11.77% • Intangibles risk patents & litigation 12.0% • DR = Rf + (Er) + Size + IP • Scenario probabilities: • Low – currently licensed (30%), Base – expand by 4.3 mgy (50%), High – expand by 9.7 mgy (20%) Example
Valuation • Conclusions: • Fair market value of the patent portfolio: • Current licensees and expansion to existing plants • Engineering revenue (installation/maintenance) • Patents expire mid 2025 • US$58 million • Net orderly liquidation: • Maintain current licensees (18) under contract • No additional engineering services revenue • US$30 million Example
Expert Witness • Patent Infringement (Title 35 U.S.C. 284) The court shall award a successful claimant damages adequate to compensate for the infringement [lost profits], but in no event less than a reasonable royalty, plus interest and costs. • In addition: • Enhanced damages (up to 3x) if willful • Attorneys’ fees (in exceptional cases) IP Damages – main types
Expert Witness • Trademark Infringement (Title 15 U.S.C. 1117a) The Plaintiff shall be entitled, subject to the principles of equity, to recover (1) defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action. • In addition: • Enhanced damages (up to 3x) if willful • Attorneys’ fees (in exceptional cases) IP Damages – main types
Expert Witness • Copyright Infringement (Title 17 U.S.C. 504) The copyright owner is entitled to recover the actual damages suffered by him or her as a result of the infringement, and any profits of the infringer that are attributable to the infringement and are not taken into account in computing the actual damages. • Alternatively • Statutory damages: no less than $750 per work and up to $30,000 as the court considers just • In addition: • Attorneys’ fees (in exceptional cases) IP Damages – main types
Monetization • Due diligence support • IP asset inventory • Asset prioritization • Monetization strategy consulting • Sale, license, joint venture • Marketing IP assets • Marketing materials development • Strategic and financial buyers database • Contact tracking, website support • Offers management, auction support • Highly experienced in trademarks and wireless and internet-based technologies IP Monetization services