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IP and Finance:

Accounting and Valuation of IP Assets;

IP-based Financing

WIPO TRAINING OF TRAINERS PROGRAM ON EFFECTIVE INTELLECTUAL PROPERTY

ASSET MANAGEMENT BY SMALL AND MEDIUM-SIZED ENTERPRISES IN DUBAI

WORLD INTELLECTUAL PROPERTY ORGANIZATION

Dubai, December 19 to 23, 2010

Rachna Singh Puri Xellect IP Solutions, India

www.xellectip.com

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Assets

Wealth of a business includes:• Working Capital• Fixed Assets• Intangible Assets

– IP Assets • Created by law

• Identifiable

• Transferable

• Have economic life

- Other in-identifiable assets like know-how, work force etc

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Value Of An IP Asset

Value of the FUTURE economic benefit

- Ability to exclude competitors from a market- Ability to maintain/gain market share

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Value different than Price (monetary amount in trading)-Value to a buyer usually exceeds the price paid

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Context of Value

• Is the asset in use/ not in use• Validity and strength of the asset• Legal, tax, financial or other business

circumstance

Reason for valuationValuation method used

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Reasons for Valuation

Transactions involving IP Assets

- buying- selling - licensing - franchising- merger & acquisition, joint ventures

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Selling IP Assets

• Permanently transfer ownership of the

patent to another entity.

• Receive an agreed-upon payment

once, with no future royalties

• Value obtained immediately, without

having to wait any longer to realize that

value progressively

• Avoid any unforeseen risks that will

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Licensing IP Assets

• Obtain the benefit of royalties for the remainder

of the life of the IP

• Slow incremental value for longer time period

• Particularly useful if the company that owns the

IP is not in a position to conduct business:

– at all

– in sufficient quantity to meet a given market need

– in a given geographical areaDecember 17,

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Licensing Opportunities

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• Exclusive license: a single licensee has

the right to use the IP, which cannot even

be used by the owner

• Sole license: a single licensee and the

owner have the right to use the IP

• Non-exclusive license: several licensees

and the owner have the right to use the IP

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Identifying Potential Commericalizing Entities

• Conduct Competitive Intelligence• Find synergistic partners for:

– Research collaboration– Manufacturing– Marketing

• Points to consider:– Technology – Market – Customer needs

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Considerations

• Financials– Lump Sums

– Royalties

• Financial Administration

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• Subject Matter• Extent of Rights• Exclusivity– Or Lack Thereof– Most Favored Licensee

• Territory• Sub-license• Improvements by– Licensee– Licensor

• Technical Assistance

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Financing based on IP Assets

Attracting investment

Procuring loans

Borrowing against the license streamSecuritization of IP assets

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• Litigation• Financial Reporting• Taxation• Bankruptcy

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Characteristics of IP Assets

• Trademarks– leverage the brand equity through brand extensions,

franchise set-ups

• Patents– exclusivity for markets, technologies

• Designs– strong customer connect like in trademarks

• Copyrights– derivatives for downstream revenues from

merchandizing, adaptations

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Valuation method would differ for each and for combinations

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Time Periods for Different Forms of IP

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Copyrights Trademarks

5 0 y e a r s F o r e v e r

Industrial Designs

1 5 years

Valuation method would account for different time-periods for different assets

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Standard for Valuation

• Fair Market Value– Based on willingness to exchange between

the buyer and seller, common valuation method for most IP assets

• Fair Price Value– Post transaction purchase price allocation

(value in-use), mostly used in litigation

Who is the assumed buyer of the asset?

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Traditional Valuation Methods

• Transaction/Market Method– Actual price/royalty paid for a similar asset under similar

circumstances

• Income method– Expected income stream that the asset holder would get

during the lifetime of the asset

• Replacement Cost method– Establishes the value of the asset by calculating the cost of

developing a similar asset either internally or externally

• Life Cycle based methodsDecember 17,

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New Valuation Methods

• Option-based methods– Based on the option pricing methods initially

developed for use in pricing stock options

• Other Methods using probabilistic estimates

- Compute probability of favorable event- Compute payoff if the favorable event occurs

• Real Option method • Monte Carlo simulations• Binomial Expansion method

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Limitations of Valuation methods

• Depends on the context• Transaction method - right selection of baseline

may not be available• Income Method - Predictive, as good as

assumptions • Replacement Cost Method - Not accurate

representation of value, development cost may be small, but market impact may be huge

• New Methods - Dependence on probabilities

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Example 1

Transaction Method: Trademark

Context: Royalty rate for trademark for a UAE health supplement company and its several overseas affiliates for Tax purpose (Test Contract) Identify a baseline transaction and make adjustments

- royalty at 8% of net sales (Base Contract)

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Attribute Base Contract Test Contract Adjustment Method

Adjustment

Location Latin America Asia Subjective estimate + 0.2%

Advertisement Support None Upto USD 2M in year 1

Reimburse +0.2%

IP strength Strong Moderate IP Firm Analysis -0.5%

Term of contract 5 years renewable

3 years renewable None 0

25% royalty rate (net profit) is

also often used

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Example 2

Income Method : Trademark

Context: Trademark of a retail gasoline brand for tax planning

Identify price for similar grade unbranded gasoline Price premium for trademark brand = USD 50

- Downward adjustments for costs for advertising, promotions, etc (APP) (0.2%)

Estimate Annual expected sales (AS) =USD 3,000,000 Time : Infinite life Discount Rate of 20% based on typical rates of return

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Trademark /Brand Premium=USD 29,880,000

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Example 3

Replacement Cost Method: Patents

Context: A company spends USD 250,000 per year to develop and patent a technology Period for development: 2 years Time cost of money :10% per annum Risk for success (Chances for failure in market): 40%

Replacement cost = (Total Funds invested + Time Cost for money )* Success Factor[500,000 + {250,000*.1 + 500,000*.1) ]*1.67

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Replacement Cost = USD 960,250

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Example 4a

Life Cycle Based valuation of Assets: PatentsContext: Licensing, term: life of longest running patent (14.5

years), min. gross royalty : USD 100,000 per annum, payment net of tax, VAT : 16%, withholding tax 10%

Net royalty revenue = 88,400 USD pa

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Life Discount Rate

NPV Year

1st year 2nd year 3rd year 14th year

14. 5 14% 542967 88400 76023 65380 10701

7 7% 476300

Conservative Approach

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Example 4b

Life Cycle Based valuation of Assets: Patents

Added Context for Example 4 case: Sales and Profit estimates for the assets

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Years 1st 2nd 3rd

Sales USD Million

4.5 6 10

5% royalty .225 .300 .500

75% net profit

.68 .90 1.50

NPV of future net profit = 11.3 Million

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Example 5

Binomial Method: Use of decision tree method

Context: non commercialized patent for

a new diagnostic test device for negotiated sale

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Event Probability

Successful prototype development 75%

Hospitals agree to field test the diagnostic test device

50%

Patent Effective 75%

Design around or a new technology 50%

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Example 5 Contd.

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Annual Value 5000 USD

25%

75%

25%

50%

50%

50%

50%

75%

Prototype is not successful

Hospitals

Patent ineffective

Design

20,000USD

40,000USD

160,000USD

320,000 USD

After estimating the “expected” licensing fee, calculate the net present value using income method or any alternate method

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References & Resources

Acknowledgement: This presentation includes concepts and materials from several resources including:– IP Panorama– Valuing and Pricing of Technology based Intellectual Property,

Richard Razgaitis, 2003 – Intangible Asset & Intellectual Property Valuation: A

multidisciplinary Perspective, Paul Flignor & David Orozco, 2006– WIPO/INN/DDK/00/5(a), Paper by Dr John Turner, Flinders

Technologies Pty Ltd, 2000– Other WIPO resources on IP Valuation

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WIPO RESOURCES FOR SMEs

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