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“Valuation requires an intermediate perspective between ignorance and certainty, involving the exercise of skill, experience and judgment” ……………(Razgatis) I P V A L U A T ION IP Valuation Objectives To survey the basic principles of IP Valuation Techniques. To develop a better appreciation for the role of Valuation in the business and academic environments. To reinforce negotiation skills using Valuation as a routine practice. To develop and establish practical guidelines and “Rules of Thumb” principles for OTT licensing. IP - a ‘Right’ or ‘Asset’ or ‘Both’ - Intellectual Property (IP) refers to an intellectual capital or intangible asset or an innovation or an idea which may or may not have a legal enforceable right. For example, the legal right of a patent is valid for only 20 years but the technology may still be an intellectual property. Intellectual Property Rights (IPRs) on the other hand refers to a legally enforceable right. In case of a patent it authorizes the patentee to prevent others from using the technology for 20 years without his permission. However IPR does not necessarily result in to economic benefit, till it is commercialized. Assets of Business entity Intangible Assets Tangible Assets Good Will Current Trademarks Cash & Assets marketable Technology Securities Intellectual Property (IP) Fixed Assets Property, plant, Know-how equipment Trade Secrets Essentials of Recognition for Intangible Asset Certainty of future economic benefits The cost of the asset can be measured reliably What is Value Value is not the price or cost, although at times they are equivalent. Value is all future economic benefits of ownership compressed in one payment. Value is continually changing as the future benefits increase or decrease with the passage of time. VALUE: A negotiated amount agreed by the parties. Seller Buyer V • My Advantage A • Need • How Much to Ask L • Cost • Demand U • Competition • Alternatives • Alternatives E What is Value Determining Value is complicated We want to give a value to something that will take its final form and impact producers and consumers in the future. But we can understand value only in terms of today situations. Then we look at a valuation model that gives a present value of a future situation The Problems We don’t know what will happen with the technology during the development period. We don’t know what will be the market dynamics at the time of market entrance. We don’t know how the technology will impact the producer’s finances We don’t know the future cost of money Standards of Value Fair Market Value Fair Value Standards of Value Market Value Investment Value Collateral Value Arm's-Length Standard Other Standards of Value Premises of Value Highest and Best Use Criteria Alternative Premises of Value — Value in continued use, as part of a going- concern business enterprise — Value in place, but not in current use in the production of income — Value in exchange, as part of an orderly disposition — Value in exchange, as part of a forced liquidation (fire sale) Why Value your IP? By ascribing a value to IP and placing it on your balance sheet, your business is more attractive to potential investors and buyers. More specifically, if you invest the time and expense to identify and value your IP, you will benefit by: Determining a better idea of the overall value of your business; Provide a tool to measure and manage your assets; Provide security and backing for lenders; Provide taxation benefits (taxation deductions); and Reducing the proportion of business’ net worth attributed to goodwill – important when selling a business. What is IP Valuation It is a method/ process to leverage Intellectual Property to grow the business. To understand the potential of Intellectual Property, estimation of its value becomes important. IP Valuation & Value of IP Value of IP = Price of IP Value of IP represents the potential current and future benefits to the IP user Price of IP represents the amount of money that ownership of an underlying IP would be exchanged between willing buyer and seller General principles of IP Valuation General factors Value defined as present value of future benefits derived by the owner Quantify future benefits and calculate present value Fair market value Highest money price prevailing Open unrestricted market Willing informed buyer and seller Arms length and no compulsion to transact M O N EY Purposes and Uses of IP/ Intangible Asset Valuations Financial Reporting Sale Transaction Support Licensing Strategic Alliances Infringement Damages Transfer Pricing Equity Raising Collateral-based Financing The criteria for recognising IP To recognise, value and record your IP you must be able to: Identify your IP as a separate, IP standalone Asset; Sell or transfer your IP (i.e. brands and patents which can be sold or licensed); Protect your IP (this will also increase the value of your IP); and Recognise your IP as enduring in nature. Motivation for IP Valuation Traditional Bank Financing Angel/Venture Capital Investing Licensing Sale, Merger, Acquisition Employee Compensation, Gift Bankruptcy/Liquidation IP Investment Holding Company Joint Ventures/Strategic Alliances Taxation/Transfer Pricing Capital Markets/Securitization Insurance Enforcement/Litigation Off-balance sheet financing Valuation issues What exactly is the IP and how does the protection it affords add value to the business? What is the useful economic life of the IP? What is the strength of the IP ? Is the IP completely new, or a modification of existing IP? How broad are the patent claims for example? What is the likelihood of technological change, and what are the capital requirements for such change? Are there alternative technologies and/or competitive pressures? Are there any substitutes available and, if so, at what cost? What effect will the skills and depth of management have on the exploitation of the IP ? How will the market respond to the new technology? Will there be a resistance to change? Will there be any regulatory restrictions/difficulties? Are there any strategic factors at play that make the IP more valuable in the hands of the acquirer? PURPOSE - WHY VALUE IP? To understand the assets held by the organization 1 and improve decision making, particularly in relation to determining future investment or development. 2 To determine a ‘walk-away’ position in negotiations. 3 To secure financial investment. 4 To establish damages for infringements. 5 For legal and accounting standards requirements. For taxation, particularly capital gains tax and stamp 6 duty liabilities. Benefits of value assessment Targeted valuation of IP, technologies and products can generate significant awareness and incremental value throughout the organization by helping companies to: Choose between market opportunities; More effectively protect and leverage the IP portfolio and important technology necessary to capture innovation and future growth; Develop a strategy for IP development and protection that is closely aligned with the company’s overall strategic goals; Identify un-tapped value and revenue opportunities; Compare and select projects for the best allocation of the development budget; Better utilise the IP portfolio through various commercialization avenues such as licensing, donation, joint ventures, divestiture, transfer to suppliers, set-up of subsidiaries, spin-offs, etc. Justify a return on investment for technology and patents; Reflect overall company value more accurately on financial statements. Identifying intangible assets Industrial Property: patents covering products or processes, TM & service marks Brands: marks, consumer goods, corporate names and identity; Copyrights: computer software, documentation of processes & business methods Valuable IP Assets Publishing Rights: magazines, books, film and music rights; Licenses: television and radio, franchises, distribution rights Know-how Simplified Valuation Process Identified the source of IP • If outsourced, consult and seek professional Advice • If developed in house Analyse the key benefits of IP Determine preferred to market pathway Determine preferred valuation method (choose at least two) Comparable Future Income Cost Based Elimination Benchmark Stream Approach Undertake market research for specific figures and compare Confirmed with professional advice AND/OR test IP Assets Valuation-Different Approach Cost Approach: Market Approach : Estimates the value of underlying IP asset basing on Based on the value of similar historical cost incurred in or comparable assets that developing the asset have been exchanged, at arm’s length, in active Replacement cost market. Reproduction cost. Income Approach Income Approach: Based on the income-producing capability of underlying IP asset Seeks to establish the net present value (hence use of discounted cash flow) Technology Life Cycle Market Approach Income Approach Cost Approach Increasing data availability Idea Business Plan Commercialization Time→ The Valuation Pyramid Any valuation exercise can be viewed as a ‘pyramid,’ where each level supports the analysis generated on the level: How the valuation analysis solves a business problem or answers a specific business question. Deliverable Business, legal & economic attributes Transaction of the IP asset are defined. Option Income Cost Specific quantification & financial analysis is performed to generate a financial result. Legal Business Financial Underlying rationale and key assumptions of the IP Purpose Description Premise Standard valuation. Top Damage Awards for US Patent Infringement Parties Award Date (USD Million) 1. Polaroid v. Eastern Kodak 873 Jan-91 2. Cordis v. Boston Scientific 324 Dec-00 3. Cordis v. Medtronic AVE 271 Dec-00 4. Howarth v. Steelcase 211 Dec-96 5. Smith International v. Hughes Tool 204 Mar-86 6. Procter & Gamble v. Paragon Trade 178 Aug-98 7. Exxon v. Mobil Oil 171 Aug-98 8. Viskase v. American National Can 164 Jul-99 9. Hughes Aircraft v. United States 154 Jun-94 10. 3M v. Johnson & Johnson 129 Sep-92 Intellectual Property Valuation Valuation models may be broadly divided into two – Static models Estimate value of accumulated intellectual assets at a point in time. Does not differentiate temporal differences in the accumulated IP. Does not differentiate the differences among different categories of IA at the time of valuation. Dynamic models Take into consideration the temporal difference in the accumulated intellectual assets (e.g. time value of money and riskiness of the forecast cash flow) Value investments in intangibles each at a time. Intellectual Property Valuation Projected economic income of underlying IP Economic life Discounted Cash Flow Discounting the projected economic income of the discrete projection period PV arrived at by the use of discount rate IP Valuation Concept Market Value – Comparative Price in Market Fair Value IP Valuation Concept Tax Value Owner’s Value – Proprietor’s View Brand vs. Trademark A brand is more than a trademark or a logo. It is a trust mark. The brand value is the intellectual capital or the intangible assets which is built over a period of time for the established quality and goodwill A trademark is an IPR which authorises right of infringement to protect the brand value Market Capitalization vs. Book Value Stock Market Valuation on the basis of price-earning ratio and earning per share is one of the major indication of the valuation of the enterprise which as a major content of intangible assets, in case of technology companies and for those which has established goodwill and brands. If we reduce the book value from such market capitalization, we arrive at the value of intangible assets. We can adjust it for market volatility on certain basis. Non – Performing IP Assets For-profit companies that own thousands of unused and unlicensed IP assets are the norm. To license out the unused IP assets, just as one would any other non-performing asset. They actually have a negative cash flow, because the company must pay their annual patent maintenance fees. Time Period Economic Life - Product Life Cycle — Discontinuous Innovation — Congruent Innovation Economic Life - Technological Obsolescence Economic Life - Functional Obsolescence Legislated/Statutory Life Contractual Life IP Valuation by ITAG IP Mining Recording and developing IP portfolio Valuing portfolio with utmost care and prudency Periodic review of portfolio to determine its current and future potential Enlightenment of the under exploited assets Conclusion Valuation is not a science, but an external based on heterogeneous information pertaining IP, product and business project. The benefit dramatically, however, by the input data and the scientific methodologies. Because of the increasing importance company’s valuation, turning ideas and innovation profit is and will continue to be the biggest and the greatest reward of companies information age. Understanding the affecting value favors the best allocation of fuels sound strategic decision making.
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