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IntroductionValuation of intellectual property is not the core work of most attorneys. The goal today is to provide a working knowledge so you’ll know what questions to ask and have a better sense of the process.Intellectual property has become the driver of value creation in many industries. 80% of the market value of Fortune 500 is attributed to intangible assets, including IP, up from 40% in 1975Managing tangible assets is well-established, managing intangible assets, less so. “You can’t manage what you can’t measure” --Peter Drucker. Valuing IP is basic to managing it well.
Overview1. Types of Intellectual Property (IP) 2. Determining the Valuation Assignment3. IP Valuation Methods4. Performing Due Diligence5. Selecting a Valuation Specialist6. Data & Document Gathering: Analyst
Defining the AssignmentWhat exactly is the property to be valued?How will the valuation be used?Value at what date? Current? Historical?Who is the audience? What is their focus?What level of documentation?Does client or analyst select techniques?When is the work product needed?Who is to be the analyst’s contact?Is the existence of the valuation
Defining the AssignmentWhich, if any, certification standards?
Uniform Standards of Professional Appraisal Practice (USPAP)?, Federal Court Rule 26?, IRS regulations 197 (Definition and valuation of intangible assets), 482 (Intra-company transfer prices), & 170 (qualified appraisal & appraiser)? Non-certified?
What level of precision is desired?Maximizing−very existence of the enterprise is at stakeOptimizing−cost and value of precision is balancedSatisfying levels−when lower cost information is “good
enough”An opinion letter states analyst’s judgment of value
based on experience without a bottom-up analysisSingle asset vs. portfolio of related or unrelated assets
Separate calculations for each assetSampling/ Key assets
Is asset an entire product? Business model? Franchise?
Is it a platform technology?Is it a component?Is it a sustainable competitive advantage?Does it have or justify a premium price?Is it a new or established market? Who or what is competition? Situation of client? Growth? Profitable? Stable? Who has more power in the hypothetical transaction?
New competition, obsolescence Market acceptance Environment-economy, interest rates, buyer confidence,
regulatory
Risk AdjustmentsDiscount interest rateDirect increase or decrease in value by factors(c) 2014 Armitage, Billion,
Hanson 12
General Valuation Approaches
Disaggregate the value question into many smaller questions which can be answered with public data or assumptions that are are narrower and can be evaluated
Three traditional approaches like appraising a house Income: values the future benefit stream, then discounts back to a
present value. Looking ahead.
Market: uses comparables to establish relative value. Looking around.
Cost: cost to create the asset. Looking back.
Use multiple approaches & techniques in a single valuationReality checks from multiple perspectives
13(c) 2014 Armitage, Billion, Hanson
Cost Approach Cumulative investment in asset
Cost is close to value in building construction, but not all IP Profit leverage of IP can be significant, so cost ≠ value
Cost Techniques Replacement or Historical Cost Equal Return Payments-ERP
“Fair” split of between buyer/seller for more developed assets
Both parties earn the same rate of return on their investments
Remaining cost to market, Risk-adjusted NPV EBIT Disaggregation of profits by asset class
Rule of Thumb: 25% Rule (% of EBIT created goes to IP developer)
Discounted cash flow (NPV) of gross margin or cost savings Economic life of asset Selecting the discount rate (what risks are covered, cost of capital)
Examples of Specific Techniques NPV (less R&D and launch costs paid by buyer) of EBIT NPV with Probabilities Method
Technical success Commercial success Cost of failure
Cost Savings NPV*25% (cost saving are a positive economic benefit)
Expected Commercial Value Probability of commercial success applies to launch costs Probability of technical success applies to R&D costs Adjusts the present value of future earnings from the asset
Valuation OpinionSummary statement of valuePurpose for which valuation was created Limitations on use of valuationValue “as of” dateProfessional liability boilerplatePage 24 in ABC Company example valuation
Example: ABC Company Actual valuation, used with permission after redactions & modified
demand estimates
Purpose: Set a reasonable asking price for portfolio and show buyer the economic benefits (Value-created)
Primary market research on adoption obstacles
Value date: calculations going forward till end of patent term (17 years)
Portfolio: Patent, trademark, hardware system design & software (p. 4)
Potential buyers with 3 business models valued Potential market size—8 market segments sized Addressable market-13-50% of potential by biz model Cash-flow by type of buyer (3) * 8 segments = 24 estimates Valuation by Buyer Type and Market Segments (Field-of-Use) created
Pages 10-15 covers Income ApproachUS Patent so US only demand estimatedOther assumptions & comparable royalty results p 11-12Five techniques, 4 used in Value-created estimate, 1 in
Face-to-face meetings or telecom preferenceBudget DeadlinesTechnical/industry expertiseWorking relationshipLitigation/non-litigationIRS/non-IRS audienceProfessional certificationsA person, not the firm, does the work
Internal data & interviews with key personnelPatent, trademark, etc. listsEncumbrances to IP assetsPast offers for the IPLitigation historyProduct lists, marketing materials, tech
manuals, price lists, customer listsProduct/division/firm financialsResource people contact information