key concepts in intellectual property valuation nevium 2013
TRANSCRIPT
1
Key Concepts in Intellectual Property Valua4on
March 2013
Brian Buss, CFA Doug Bania, CLP
Introduc4on
Our View of IP
The Why, What & How of IP Valua4on
Key Concepts of IP Analysis
IP Analysis Example
Nevium Intellectual Property Solutions
3
Develops supportable financial and economic analyses for clients ranging from law firms to entrepreneurs to fortune 500 corporations to not-for-profit organizations. Brian applies his experience in finance, banking and valuation to value individual assets and bundles of intellectual properties, calculate damages in IP infringement disputes, and develop return on investment analyses to support strategic decisions. • 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 continents
Brian Buss Works closely with clients to develop licensing and monetization strategies for assets including trademarks, patents, brands, publicity rights and copyrights. Using his experience analyzing and structuring intellectual property transactions, Doug serves clients as an expert witness, negotiating transactions and in implementing IP strategies. Doug is an active member of San Diego’s Licensing Executive Society, currently serving 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 property advisory and management
Doug Bania
Complementary skills and experience
4
Responsibility Chain Complementary Views on IP
A Financial and
Economic View of IP
IP Development and Ownership
IP Business Management
IP Legal Management
5
Responsibility Chain Valuation Basics
Art & Science . . .
but not Magic
Value = Present Value of Future Benefits
Fair Market Value = price at which un-related parties would transact
Valuation happens every day, only some valuations involve a formal analysis
IP Valuation requires one more step compared to Business Valuation
How IP Contributes to Value
6
Descrip4on Economic Benefits
Monopoly Barrier to entry, exclude others from using
• Pricing power • Greater profit margins
Li4ga4on Seek damages if others use
• Li>ga>on award (PV of award less costs)
• Threat of li>ga>on (force “Monopoly” or “Permission”)
Permission Ability to be compensated when others use
• Value of license (PV of royal>es+fees – costs)
• Value if sold
Promo4on
Signals innova>on, uniqueness, source of origin to consumers
• Addi>onal sales • Reduced marke>ng • Incremental margin
Value Derived
From the Economic Benefits Created
IP Valua4on: What / Why / How
Why
8
Buying or selling
Licensing
Bankruptcy
Build, buy or license
IP portfolio alignment
ROI, ROMI
Our first question: “Why do you need the Asset valued?”
Fair value reporting
Purchase price allocation
Impairment testing
Estate transfers & contributions
Transfer pricing
Non-profit to for-profit
Eminent domain
Damages
Valuation
Strategy / Transactions
Compliance Litigation
Context impacts the Analyst’s approach to the assignment
What
9
Early on,
All parties agree on what is being valued
Our 2nd question: “Which assets will be valued?”
Trademarks Copyrights
Publicity Rights
Patents Copyrights
Trade Secrets
Marketing Assets Technology Assets
Domain Names Customer Lists Relationships
Practices / Procedures
Know-how / Research Test Results
Relationships Practices / Procedures
What other assets are related to the IP?
Valuation Approaches for Brand IP Description Information Required
Cost Approach
Amount a potential buyer would pay to replace or create 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)
Income Approach
Present value of future economic benefits received from ownership of 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 forecasts
Market Approach
Value based on observed transactions involving comparable or similar assets
• Comparable transactions research • Peer Group: market share, pricing strategy & results • Similar forms of IP, IP used in similar context
How
Same Approaches as Business Valua4on . . . apply as many methodologies as possible
10
Key Concepts
12
Responsibility Chain
The Intellectual Property
& Products Profits
People Resources
Tangible Assets / Natural Resources
Business and IP Valuation
The Key in IP Valuation: Apportion
profits to the IP
IP depends on other assets and resources in order to generate economic benefits
=
Capital Resources
Other IP & IA
13
Responsibility Chain
Present Value of
Expected Future
Benefits
Value of Business =
Intangible Assets
= =
Trademarks
Copyrights
Tangible Assets
Intangible Assets
Tangible Assets
Concept 1: Apportionment
IP amongst many assets
used to generate
“Economic Benefit”
Value of Business > Value of IP Assets owned by the Business
Patents
IP Marketplace
Product Marketplace
14
Responsibility Chain
Licensor
Concept 2: Value for Whom
Transaction requires
benefit for multiple parties
For Licensee Value = Revenue – Compensation Paid
(often a Royalty)
Licensee
Customer
For Licensor Value = Royalty – Cost to
Develop & Own IP Compensation
Product Revenue
15
Responsibility Chain Concept 2: Value to Whom
Both parties expected to
benefit
0 1 2 3 4 5Forecast Licensee Sales 1,000 1,300 1,495 1,645 1,727 1,761 Growth 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 180
For IP Owner (Licensor)Up-front payment 50 Promotions Commitment (130) (150) (82) - - Promotions Commitment % 10% 10% 5% 0% 0%Annual Fee 5 5 5 5 5 % of Sales Royalty 104 120 132 138 141 Total Benefits 50 (21) (25) 54 143 146 Present Value @ 20% 50 (18) (17) 31 69 59 Value of IP to Licensor 174
Income StatementRevenues
Gross 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 all royalties are
the same
Concept 3: Royalty Rates
Best for Licensor
Best for Licensee
Fina
ncial R
isk to Licen
see $ / Unit made
$ / Unit Sold Gross Sales ($ invoiced)
Gross Sales (Collections) Net Sales Gross Profits EBIT Net Profits
Level of Benefit Drives the Royalty
16
Concept 3: Royalty Rates
Licensor Activities
Research /
Develop
Design & Test
Regulatory /
Approvals
Man
ufacture
Market
Distrib
ute
Service
Adop
t
Licensee Activities
Reasonable Royalty considers: the level of benefit, and the allocation of roles
Allocation of Roles Drive the Royalty
17
18
Concept 4: Forecasting Future Benefits
Asset Remaining Life (Years)
Cash Flow ($)
Asset Value ($)
IP: Remaining Life, Cash Flow & Value • IP and the products that use IP
have life spans • Benefits from the IP will grow, peak
and then decline as other IP and other products take their place
• Companies can expect perpetual growth, IP cannot
Guiding Concepts
Total Contribution
Patents
IP: Relative contribution
Trademarks & Other Intangibles
Time
Product Life Cycle Products & Businesses
IP Remaining Life
Business Revenues Benefit
Today’s Products
Products In-development
Future Products
Damaging Event
Time
Valua>on Date / Today
Economic Benefits
Forecast Period
But-For Results
As-Is Results
Historical Period
Damages =
lost earnings for past periods
(section “A”),
plus forecast periods
(section “B”) A
B
As-Is and But-For Scenarios
Concept 4: Forecasting Future Benefits
19
20
Tie 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 repair
Building Benefit Forecasts The Forecasts
Concept 4: Forecasting Future Benefits
21
Responsibility Chain Concept 5: Discounting Future Benefits
WACC = WARR
Rates from 15 – 30% are
typical
The Discounting Formula: • FB = forecast benefits • R = discount rate
Two Key Concepts
WACC = WAAR Principal of Substitution
One last element
22
Responsibility Chain
Intellectual Property Valuation
&
Key Concepts
Bringing it all together
Why, What & How
Apportionment
Value for Whom
Royalty Rates
Discounting
Forecasting Future Benefits
23
Financial Performance: historical, trends, forecasts, ratios
Timelines: chronologies, histories and event charts
Market Share: market positions, market maps
SWOT / Porters: identify forces shaping the business
Scoring Analyses: confusion scores, comparable claims, brand strength scores
Company Language Analysis: what competitive advantage the Company has claimed
Surveys and Intercepts: consumer preference, confusion
Royalty Rates: benchmarks, surveys and comparable transactions
Best Practices: licensing and transaction practices as described in texts and guidebooks
Tools for the Narrative
Supportable analysis
requires a cohesive
narrative . . .
and lots of tools
Combine Concepts & Build the Narrative
The Qualitative is as important as the Quantitative
A Quick Example
25
Responsibility Chain
IP Assets & Products / Services Profits
People Resources
Tangible Assets / Natural Resources
IP Valuation
Two Steps:
Determine Profits
then
Apportion
Profits to the IP Asset
An IP Asset Requires Other Resources
Capital Resources
Value of the IP Asset
Simply . . .
Forecast Profits x Apportionment =Discount
Rate x
Other IP & IA
26
Responsibility Chain Trademark Valuation Example
That’s all
Value of Trademark
Forecast Profits x Apportionment =
$1,000 year 1 x = $150
year 1
PV of Future Benefit
Apportionment Results
Analysis Type Low HighWebsite Analysis 5% 20%Company Language 15% 25%CUT 8% 12%
Use
% of Profits to IP
15%
= $603
Why Value: Sale of trademark to un-related party
Questions to Start an Analysis
27
Buying, Selling & Licensing
Is 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 or Pre-litigation
Are detailed accounting records available? Does the Asset owner engage in any licensing? How and where was the Asset used / infringed?
Management, Planning & Strategy
Is 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
Nevium Intellectual Property Solu4ons www.nevium.com 858 255 4361
Managing intellectual property is key to maximizing value