Learn the key concepts in intellectual property valuation
Transcript of Key Concepts in Intellectual Property Valuation - Nevium 2013
1. 1Key Concepts in Intellectual Property Valua4on March 2013
Brian Buss, CFADoug Bania, CLP
2. Introduc4on Our View of IP The Why, What & How of IP
Valua4on Key Concepts of IP Analysis IP Analysis Example
3. Nevium Intellectual Property Solutions3Develops supportable
financial and economicanalyses for clients ranging from law firms
toentrepreneurs to fortune 500 corporations tonot-for-profit
organizations. Brian applies hisexperience in finance, banking and
valuation tovalue individual assets and bundles ofintellectual
properties, calculate damages in IPinfringement disputes, and
develop return oninvestment analyses to support strategicdecisions.
20 year career in Valuation, Financial Analysis,Banking Charted
Financial Analyst (CFA) MBA (SDSU); BA in Biology and
Economics(Claremont McKenna College) Valuation and M&A
experience on 5 continentsBrian BussWorks closely with clients to
develop licensingand monetization strategies for assets
includingtrademarks, patents, brands, publicity rights
andcopyrights. Using his experience analyzing andstructuring
intellectual property transactions,Doug serves clients as an expert
witness,negotiating transactions and in implementing IPstrategies.
Doug is an active member of SanDiegos Licensing Executive Society,
currentlyserving as the Chair-elect. Certified Licensing
Professional (CLP) MA in Television, Film and New Media
Production;BA in Cinema Over 11 years experience in intellectual
propertyadvisory and managementDoug BaniaComplementary skills and
experience
4. 4Responsibility ChainComplementary Views on IPA
FinancialandEconomicView of IPIP Developmentand OwnershipIP
BusinessManagementIP LegalManagement
5. 5Responsibility ChainValuation BasicsArt &Science . .
.but notMagicValue = Present Value of Future BenefitsFair Market
Value = price at which un-related parties would transactValuation
happens every day, only somevaluations involve a formal analysisIP
Valuation requires one more stepcompared to Business Valuation
6. How IP Contributes to Value6Descrip4on Economic
BenetsMonopolyBarrier to entry, exclude others from using Pricing
power Greater prot marginsLi4ga4onSeek damages if others use
Li>ga>on award (PV of award less costs) Threat of
li>ga>on (force Monopoly or Permission)PermissionAbility to
be compensated when others use Value of license (PV of
royal>es+fees costs) Value if soldPromo4onSignals innova>on,
uniqueness, source of origin to consumers Addi>onal sales
Reduced marke>ng Incremental marginValueDerivedFrom
theEconomicBenefitsCreated
7. IP Valua4on: What / Why / How
8. Why8Buying or sellingLicensingBankruptcyBuild, buy or
licenseIP portfolio alignmentROI, ROMIOur first question: Why do
you need the Asset valued?Fair value reportingPurchase price
allocationImpairment testingEstate transfers
&contributionsTransfer pricingNon-profit to for-profitEminent
domainDamagesValuationStrategy /
TransactionsComplianceLitigationContext impacts the Analysts
approach to the assignment
9. What9Early on,All partiesagree on whatis being valuedOur 2nd
question: Which assets will be valued?TrademarksCopyrightsPublicity
RightsPatentsCopyrightsTrade SecretsMarketing Assets Technology
AssetsDomain NamesCustomer ListsRelationshipsPractices /
ProceduresKnow-how / ResearchTest ResultsRelationshipsPractices /
ProceduresWhat other assets are related to the IP?
10. Valuation Approaches for Brand IPDescription Information
RequiredCostApproachAmount a potential buyerwould pay to replace
orcreate an asset themself Historical Cost to develop the IP Amount
spent to promote, maintain and support the IP Estimate of cost to
replace or replicate (R&D expenses,corrective advertising, time
and effort)IncomeApproachPresent value of futureeconomic
benefitsreceived from ownershipof an asset Product-level earnings
forecast Apportion profits from products using the IP Reasonable
royalty rates & licensing compensation For damages: But-for and
As-is forecastsMarketApproachValue based onobserved
transactionsinvolving comparable orsimilar assets Comparable
transactions research Peer Group: market share, pricing strategy
& results Similar forms of IP, IP used in similar
contextHowSame Approaches as Business Valua4on . . . apply as many
methodologies as possible 10
11. Key Concepts
12. 12Responsibility ChainTheIntellectualProperty& Products
ProfitsPeople ResourcesTangible Assets /Natural ResourcesBusiness
and IP ValuationThe Key inIP Valuation:Apportionprofits to theIPIP
depends on other assets and resources in order togenerate economic
benefits=Capital ResourcesOther IP & IA
13. 13Responsibility ChainPresentValue
ofExpectedFutureBenefitsValue ofBusiness=IntangibleAssets=
=TrademarksCopyrightsTangibleAssetsIntangibleAssetsTangibleAssetsConcept
1: ApportionmentIP amongstmany assetsused
togenerateEconomicBenefitValue of Business > Value of IP Assets
owned by the BusinessPatents
14. IP MarketplaceProductMarketplace14Responsibility
ChainLicensorConcept 2: Value for WhomTransactionrequiresbenefit
formultiplepartiesFor LicenseeValue = Revenue Compensation
Paid(often a Royalty)LicenseeCustomerFor LicensorValue = Royalty
Cost toDevelop & OwnIP CompensationProduct Revenue
15. 15Responsibility ChainConcept 2: Value to WhomBoth
partiesexpected tobenefit0 1 2 3 4 5Forecast Licensee Sales 1,000
1,300 1,495 1,645 1,727 1,761Growth Rate 30% 15% 10% 5% 2%Annual
Royalty Rate 8.0% 8.0% 8.0% 8.0% 8.0%For IP User (Licensee)Up-front
payment (50)Annual Fee (5) (5) (5) (5) (5)Additional Profit Margin
15% 20% 15% 10% 5%Additional Profits - 195 299 247 173 88% of Sales
Royalty - (104) (120) (132) (138) (141)Total Benefits (50) 86 174
110 30 (58)Present Value @ 25% (50) 69 112 56 12 (19)Value of IP to
Licensee 180For IP Owner (Licensor)Up-front payment 50Promotions
Commitment (130) (150) (82) - -Promotions Commitment % 10% 10% 5%
0% 0%Annual Fee 5 5 5 5 5% of Sales Royalty 104 120 132 138
141Total Benefits 50 (21) (25) 54 143 146Present Value @ 20% 50
(18) (17) 31 69 59Value of IP to Licensor 174
16. Income StatementRevenuesGross Sales 1,000 100%Discounts 5
1%Net Revenue 995 100%Cost of Sales 450 45%Gross Profit 545
55%Operating ExpensesSales & Marketing 100 10%General &
Admin 75 8%Research & Development 50 5%Depreciation 35 4%Other
15 2%Total OpEx 275 28%Operating Income 270 27%Other Income /
(Expense)Interest, net (55) -6%Non-recurring (45) -5%Sale fo Assets
85 9%Total Other Income (15) -2%Pre-tax Income 285 29%Tax Expense
(100) -10%Net Profit 185 19%Not allroyalties arethe sameConcept 3:
Royalty RatesBest for LicensorBest for LicenseeFinancial Risk to
Licensee $ / Unit made$ / Unit SoldGross Sales ($ invoiced)Gross
Sales (Collections)Net SalesGross ProfitsEBITNet ProfitsLevel of
Benefit Drives the Royalty16
17. Concept 3: Royalty RatesLicensor ActivitiesResearch /
Develop Design & Test Regulatory / Approvals Manufacture Market
Distribute Service Adopt Licensee ActivitiesReasonable Royalty
considers:the level of benefit, and the allocation of
rolesAllocation of Roles Drive the Royalty17
18. 18Concept 4: Forecasting Future BenefitsAsset RemainingLife
(Years)Cash Flow ($)AssetValue ($)IP: Remaining Life, Cash Flow
& Value IP and the products that use IPhave life spans Benefits
from the IP will grow, peakand then decline as other IP andother
products take their place Companies can expect perpetualgrowth, IP
cannotGuiding ConceptsTotal ContributionPatentsIP: Relative
contributionTrademarks &Other IntangiblesTimeProduct Life Cycle
Products & BusinessesIP RemainingLifeBusiness
RevenuesBenefitTodaysProductsProductsIn-developmentFutureProducts
20. 20Tie the forecast to the facts Market outlook Economic
trends Peer group analysis Competitive product analysis Pricing and
discounting history Pricing strategy Share of product portfolio
Product life cycle stage Cost to clean or repairBuilding Benefit
ForecastsThe ForecastsConcept 4: Forecasting Future Benefits
21. 21Responsibility ChainConcept 5: Discounting Future
BenefitsWACC =WARRRates from15 30% aretypicalThe Discounting
Formula: FB = forecast benefits R = discount rateTwo Key
ConceptsWACC = WAAR Principal of Substitution
22. One lastelement22Responsibility
ChainIntellectualPropertyValuation&Key ConceptsBringing it all
togetherWhy, What & HowApportionmentValue for WhomRoyalty
RatesDiscountingForecasting Future Benefits
23. 23Financial Performance: historical, trends, forecasts,
ratiosTimelines: chronologies, histories and event chartsMarket
Share: market positions, market mapsSWOT / Porters: identify forces
shaping the businessScoring Analyses: confusion scores, comparable
claims, brandstrength scoresCompany Language Analysis: what
competitive advantage theCompany has claimedSurveys and Intercepts:
consumer preference, confusionRoyalty Rates: benchmarks, surveys
and comparabletransactionsBest Practices: licensing and transaction
practices as describedin texts and guidebooksTools for the
NarrativeSupportableanalysisrequires acohesivenarrative . . .and
lots oftoolsCombine Concepts & Build the NarrativeThe
Qualitative is as important as the Quantitative
24. A Quick Example
25. 25Responsibility ChainIP Assets&Products/
ServicesProfitsPeople ResourcesTangible Assets /Natural ResourcesIP
ValuationTwo Steps:DetermineProfitsthenApportionProfits to theIP
AssetAn IP Asset Requires Other ResourcesCapital ResourcesValue of
theIP AssetSimply . . .ForecastProfitsx Apportionment
=DiscountRatexOther IP & IA
26. 26Responsibility ChainTrademark Valuation ExampleThats
allValue ofTrademarkForecastProfitsx Apportionment =$1,000year 1x
=$150year 1PV of Future BenefitApportionment ResultsAnalysis Type
Low HighWebsite Analysis 5% 20%Company Language 15% 25%CUT 8%
12%Use% of Profits to IP15%= $603Why Value: Sale of trademark to
un-related party
27. Questions to Start an Analysis27Buying, Selling
&LicensingIs an earnings forecast or business plan
available?Who else would use the Assets?Are there any outside
claims to the Assets?Does the current owner of the Assets engage in
any licensing?Tax & Compliance Which products rely on the
Assets?How will use of the Assets change after the transfer?What
are the key assets of the organization?Do records of cost to
create/develop exist?Bankruptcy What is the reorganization
plan?Which products rely on the Assets?What are the key assets of
the organization?Litigation orPre-litigationAre detailed accounting
records available?Does the Asset owner engage in any licensing?How
and where was the Asset used / infringed?Management,Planning
&StrategyIs an earnings forecast or business plan
available?Does the Asset owner engage in any licensing?Which
products rely on the Assets?What are the key assets of the
Organization?
28. 28Nevium Intellectual Property Solu4ons www.nevium.com 858
255 4361 Managing intellectual property iskey to maximizing
value