The document provides an overview of intellectual property (IP) valuation. It discusses why IP valuation is important for various contexts such as transactions, taxation, and disputes. It also covers different types of IP assets and valuation methodologies. The document uses case studies to illustrate how the context can impact the valuation approach and the importance of identifying all relevant IP assets. It emphasizes that IP valuation is both an art and a science that requires considering multiple factors.

1. IP Valuation
September, 2011
CONSOR Intellectual Asset Management
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2. Why IP Valuation?
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? • Buy, sell or transfer
• How much value? • Disputed ownership
• How and when does value • Improve performance
change?
• Collateralization
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3. What is IP?
Intellectual Property vs. Intangible Assets
Bundles of IP and IA Assets
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4. Context: Property Types
Intangible Assets
Intellectual Properties
Customer &
Vendor
Patents Trademarks Data Bases Relationships
Trade Internet Proprietary
Copyrights
Secrets Assets Systems
IA vs. IP: Commercialized Separate from Other Assets
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5. IP Property Types
Bundles of Intangible Assets (IA),
each contains Intellectual Properties (IP)
Marketing Relationship (Customer / Supplier)
Marks, brands, names, domains Customer / Supplier
relationships
Trade-dress, packaging, logos
Distribution networks
Non-competes, key-person
Order backlog
Technology Contract
Technologies, know-how, License / royalty, lease,
systems, methods franchise
Patents, software, recipes, Permits, use rights, broadcast
content, databases rights
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6. Valuation Methodologies
Cost Income Market
Economic principal of Present value of future Value based on price of
substitution economic benefit similar assets
Description
Measures expense Requires projections Requires suitable
required to replace and a risk assessment comparable assets
Neglects future benefit Requires allocation of
benefit specific to the
asset
Replication / DCF Comparable
Application
replacement feasible transactions
Relief from Royalty
Benchmarking Benchmarking
Valuation as Art and Science
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7. Valuation Tools of the Trade
The “Science” of Valuation
Discounted Cash Flow Models
Comparable Valuation Ratios
Replacement Cost
Relief from Royalty
Allocation / Excess Earnings
Option Models
Proprietary Approaches
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8. Changing Valuation Terminology
Level of Value Value Definitions
Fair Market Value
Fair Value
MVIC Strategic Value
MVE
= Assets + Liquidation Value
Liabilities = 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”
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9. Case: Improper Use of a Character
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
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10. Case: Improper Use of a Character
Methodology Approach Results ($millions)
Defendant's Annual
Advertising Budget
Cost 875 925
Comparable Endorsements Market 50 90
Comparable Sponsorship
Fees
Market 25 85
Reasonable Royalty Income 1,100 1,200
Case Take-away: Context is Key
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11. A more complex case showing
the importance of Context, and
the importance of identifying IP
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12. Case: Identifying IP
• 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?
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13. Case: Identifying IP
Can see its there . . .
Net Revenue 20,000,000
Comps Average Subject
Earnings Margin 10% 25%
Operating Income 2,000,000 5,000,000
Market Earnings Multiple Comp. pub lic 6.0x 6.0x
financial companies
Implied MVIC 12,000,000 30,000,000
Value of Tangible Assets Book value per (500,000) (500,000)
Balance Sheet
Value of Goodwill 11,500,000 29,500,000
Subject's Excess Earnings 3,000,000
Subject's Proprietary Intangible Assets 18,000,000
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14. Case: Identifying IP
• 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
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15. Value Constraints
Brand / Trade
Names
Value of Business
Intangible Intellectual
Present Value of Assets Properties
Expected Future
= Benefit = =
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
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16. Case: Impact of Context
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?
Sources of Funds Use of Funds Allocation
Cash 50 Buy Equity 400 A/R 25
Stock 275 Repay Debt 100 Inventory 50
New Debt 200 Costs 25 PP&E 100
Goodwill 350
Total 525 Total 525 Total 525
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17. Can Value of IP > MVIC?
Allocation Goodwill Acquired
Context Drives the Science A/R 25 Brands 150
• Value of IP cannot Inventory 50 Patents 65
exceed MVIC in a PP&E 100 Databases 115
purchase price Goodwill 350 Other IA 20
allocation
Total 525 Total 350
• Value of each IP = PV of
future benefit each IP
Tools / Science
provides to Company’s
• Forecast cash flows by product
cash flow
• 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
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18. What if the Context Changes?
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)
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19. What if the Context Changes?
What if we don’t have a completed transaction between
a wiling buyer and a willing seller?
IP Valuation Methodologies All these approaches
• Comparable Transactions construct a
• Relief from Royalty hypothetical
• Discount Future Benefit agreement between IP
• Replacement Cost Owner and IP User
Crafting the Hypothetical Agreement Requires Art and Science
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20. Hypothetical Agreements
No More Rules of Thumb Replacing Rules of Thumb
• Uniloc USA v. Microsoft Corp: • Licensing agreement =
applicable specifically to IP analysis contractual financial
agreement
• End of the 25% rule = “End of the
unsupported conclusion” • Commitments can and do
take many forms
• Averages & Surveys as the
lemming’s rule of thumb • Hypothetical agreements
must reflect their real-
• If it’s a universal norm, it can’t world counterparts
meet the criteria for comparables
This Shouldn’t be Shocking
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21. Reflecting Real-world Complexity?
A Typical Relief From Royalty Calculation
Annual Sales of Brand X $ 100,000
Industry Average Royalty Rate 8.0%
Estimated Annual Royalty Income 8,000
Term (years) 10
Annual Discount Rate 15.0%
Total Value / Damages $ 40,150
Did Consider . . . Assumed . . .
• Forecast benefit (sales, term) • Constant sales
• Industry dynamics (rate) • Industry average royalty rate
• Risk assessment • No changes during term
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22. Case: Alternative Royalty Rate Analyses
• 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
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23. Case: Alternative Royalty Rate Analyses
Royalty Rate Build-up Method: BVEq
BVEQ= CBV + (IVE1 + IVE2 + …. + IVEN)
Brand Value Components Range (%)
CBV Core Brand Value 1.0 2.0
IVE 1 Sub-brands 0.0 0.0
IVE 2 Global Brand Marketing 0.1 0.1
IVE 3 Incremental Sales for Licensee 0.1 0.1
IVE 4 New Product Development 0.2 0.3
IVE 5 Other Brand Assets 0.1 0.3
Total 1.5 2.8
Surveys and Comparable Transactions are not The Only Tools Available
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24. Case: Reflecting Reality
Period 0 1 2 3 4 5
Licensee Sales 1,024 1,229 1,290 1,322 1,356
Annual Royalty Rate 8.0% 5.0% 5.0% 3.0% 3.0%
Licensee Benefits
Up-front Payment (50)
Additional Margin 52 179 205 210 215
Annual Fee (5) (5) (5) (5) (5)
% of Sales Royalty (82) (61) (65) (40) (41)
Total Benefits (50) (35) 112 135 165 169
Present Value @ 16% (50) (30) 83 86 91 81
Value of IP to Licensee 261
Licensor Benefits
Up-front Payment 50
Promotions Commitment (10) (10) (5)
Annual Fee 5 5 5 5 5
% of Sales Royalty 82 61 65 40 41
Total Benefits 50 77 56 65 45 46
Present Value @ 13% 50 68 44 45 27 25
Value of IP to Licensor 259
Take-away: “Hypothetical Negotiation” Drives Greater Analytical Burden
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25. When Valuation Issues Arise?
Question Answers
Why is valuation needed? Transaction, Infringement, Financial Reporting,
Tax/Transfer, etc.
What level of value? MVIC, MVE, Minority Interest
Who will use the value result? Accountants, IRS, Potential partners or investors,
Management, other
What information is available? Audited financials, business plans, industry
studies, etc.
What types of assets exist? Tangibles, know-how, brands, patents, designs,
relationships, etc.
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26. The Valuation Answer
Reconcile results from multiple approaches
Reconcile the calculations to the context
Context + Time = Value
There Are No Valuation Answers: Only Good Choices
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27. Handouts
Law 360 on Rules of Thumb
Considerations for Hypothetical Negotiations
20 Licensing Structure Alternatives
Criteria for Comparable Transactions
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28. Discussion
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29. CONSOR’s Services
www.consor.com 858 454 9091
IP Valuation IP Litigation Support
• Valuing patents, trademarks, copyrights, trade • Assisting attorneys with damage calculation
secrets, celebrity rights, and technology parameters & case strategy
• Helping businesses understand the value of • Proven success as expert witnesses
their IP
• Economic damages in litigation
• Valuation for transactions, tax purposes,
• Federal, state & international experience
litigation, licensing deals, and more
• Arbitration, and mediation
Licensing Consulting IP Transactions
• Assisting clients in maximizing the licensing • Maximize the value of bankrupt assets
value of their IP assets
• Identify valuable IP in bankruptcy
• Develop licensing strategies, execute, negotiate
• Market and sale of bankrupt IP assets
license agreements
• Value and dispose of intellectual property
• Licensing experts in litigation
• Evaluate financial and economic commitments
of a potential transaction
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