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© CONSOR 2011
Why IP Valuation?
2
Beyond specialized IP law practices,
business, commercial, tax and estate practitioners
Increasingly involved in identifying, protecting, applying, and defending intangible assets owned by clients.
• Value to whom?
• How much value?
• How and when does value
change?
• Buy, sell or transfer
• Disputed ownership
• Improve performance
• Collateralization
Context Purpose
© CONSOR 2011
Context: Property Types
4
IA vs. IP: Commercialized Separate from Other Assets
Internet
Assets
Data Bases
Intellectual Properties
Intangible Assets
Customer &
Vendor
RelationshipsPatents
Copyrights
Trademarks
Trade
SecretsProprietary
Systems
© CONSOR 2011
IP Property Types
5
Bundles of Intangible Assets (IA), each contains Intellectual Properties (IP)
Marketing Relationship (Customer / Supplier)
Technology Contract
Marks, brands, names, domains
Trade-dress, packaging, logos
Non-competes, key-person
Customer / Supplier
relationships
Distribution networks
Order backlog
Technologies, know-
how, systems, methods
Patents, software, recipes, conte
nt, databases
License /
royalty, lease, franchise
Permits, use rights, broadcast
rights
© CONSOR 2011
Valuation Methodologies
6
Economic principal of
substitution
Measures expense
required to replace
Neglects future benefit
Present value of future
economic benefit
Requires projections
and a risk assessment
Requires allocation of
benefit specific to the
asset
Value based on price of
similar assets
Requires suitable
comparable assets
De
sc
rip
tio
n
Replication /
replacement feasible
Benchmarking
DCF
Relief from Royalty
Comparable
transactions
Benchmarking
Ap
plica
tio
n
Valuation as Art and Science
Cost Income Market
© CONSOR 2011
Valuation Tools of the Trade
7
Discounted Cash Flow Models
Comparable Valuation Ratios
Replacement Cost
Relief from Royalty
Allocation / Excess Earnings
Option Models
Proprietary Approaches
The “Science” of Valuation
© CONSOR 2011
Changing Valuation Terminology
8
MVIC
= Assets +
Liabilities
MVE
= Equity
OwnershipMinority
Interests
Level of Value Value Definitions
Fair Market Value
Fair Value
Strategic Value
Liquidation Value
Defining the Assignment to Avoid “Bad Art”
Who’s Setting Standards?
AICPA, ASA, ISO, NACVA, IRS, Co
urts, FASB, LESI, and more
© CONSOR 2011
Case: Improper Use of a Character
9
Background
• Defendants used a character to promote products outside of the permitted terms of agreement with IP owner
• Financial data from the defendants unavailable
• Multiple methodologies applied
• Income approach calculation yields different value than market and cost approaches
© CONSOR 2011
Methodology Approach
Defendant's Annual
Advertising BudgetCost 875 925
Comparable Endorsements Market 50 90
Comparable Sponsorship
FeesMarket 25 85
Reasonable Royalty Income 1,100 1,200
Results ($millions)
Case: Improper Use of a Character
10
Case Take-away: Context is Key
© CONSOR 201111
A more complex case showing
the importance of Context, and
the importance of identifying IP
© CONSOR 2011
Case: Identifying IP
12
• Client assists municipal agencies issue bonds for public interest projects (a Public Private Partnership)
• Client has achieved substantial profits for several years
• Key competitor is a state-run agency
• State accuses client of gouging the parties it serves
• Has Client developed IP that justifies the excess profits?
© CONSOR 2011
Case: Identifying IP
13
Can see its there . . .
Net Revenue
Comps Average Subject
Earnings Margin 10% 25%
Operating Income 2,000,000 5,000,000
Market Earnings Multiple Comp. public
financial companies6.0x 6.0x
Implied MVIC 12,000,000 30,000,000
Value of Tangible Assets Book value per
Balance Sheet (500,000) (500,000)
Value of Goodwill 11,500,000 29,500,000
Subject's Excess Earnings
Subject's Proprietary Intangible Assets
20,000,000
3,000,000
18,000,000
© CONSOR 2011
Case: Identifying IP
14
• We can see IP exists . . .
• What are the key types of IP Assets?
Case Take-away: Both IP and IA Contribute to Value
Proprietary systems (some could
be commercialized)
Proprietary methods
Relationships / key people (can’t be commercialized)
History / Longevity / 1st to Market (can’t be commercialized)
IA at the CLIENT
© CONSOR 2011
Value Constraints
15
Present Value of
Expected Future
Benefit
Va
lue
of
Bu
sin
es
s
=
Tangible Assets
Intangible
Assets
= =
Tangible Assets
Intangible Assets
Brand / Trade
Names
Intellectual
Properties
Could a company’s IP assets exceed the market value of the business?
• Context: Fair Market Value (transaction did occur)
• Context Implication: Value driven by expected future benefits
© CONSOR 2011
Case: Impact of Context
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• Frequent Context for IP Valuation: Purchase Price Allocation (FAS 141/142)
• Purchase Price Creates Goodwill
• What Portion of the Acquired Goodwill should be allocated to IP?
• What are the components of the IP Allocation?
Could a company’s IP assets exceed the market value of the business?
Sources of Funds Use of Funds Allocation
Cash 50 Buy Equity 400 A/R 25
Stock 275 Repay Debt 100 Inventory 50
New Debt 200 Costs 25 PP&E 100
Goodwill 350
Total 525 Total 525 Total 525
© CONSOR 2011
Can Value of IP > MVIC?
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Tools / Science
• Forecast cash flows by product
• Quantify the interaction of IP Assets and their contribution to earnings
Context Drives the Science
• Value of IP cannot exceed MVIC in a purchase price allocation
• Value of each IP = PV of future benefit each IP provides to Company’s cash flow
Case Take-away:
Context is key / Context Can Be Forced on the Value Analyst
Allocation Goodwill Acquired
A/R 25 Brands 150
Inventory 50 Patents 65
PP&E 100 Databases 115
Goodwill 350 Other IA 20
Total 525 Total 350
© CONSOR 2011
What if the Context Changes?
18
Frequent Contexts
• Infringement Damages
• Licensing / Endorsement
Damage Calculations: require application of traditional valuation methodologies to determine value of economic benefits lost, or not achieved (often when an arm’s length transaction would never have
occurred)
Licensing: requires both parties understand and estimate the present value of future economic commitments (without the benefit
of an existing arms-length transaction)
What if we don’t have a completed transaction between
a wiling buyer and a willing seller?
© CONSOR 2011
What if the Context Changes?
19
IP Valuation Methodologies
• Comparable Transactions
• Relief from Royalty
• Discount Future Benefit
• Replacement Cost
What if we don’t have a completed transaction between
a wiling buyer and a willing seller?
All these approaches construct a
hypothetical agreement between IP
Owner and IP User
Crafting the Hypothetical Agreement Requires Art and Science
© CONSOR 2011
Hypothetical Agreements
20
• Uniloc USA v. Microsoft Corp: applicable specifically to IP analysis
• End of the 25% rule = “End of the unsupported conclusion”
• Averages & Surveys as the lemming’s rule of thumb
• If it’s a universal norm, it can’t meet the criteria for comparables
This Shouldn’t be Shocking
No More Rules of Thumb
• Licensing agreement = contractual financial agreement
• Commitments can and do take many forms
• Hypothetical agreements must reflect their real-world counterparts
Replacing Rules of Thumb
© CONSOR 2011
Reflecting Real-world Complexity?
21
Did Consider . . .
• Forecast benefit (sales, term)
• Industry dynamics (rate)
• Risk assessment
A Typical Relief From Royalty Calculation
Annual Sales of Brand X 100,000$
Industry Average Royalty Rate 8.0%
Estimated Annual Royalty Income 8,000
Term (years) 10
Annual Discount Rate 15.0%
Total Value / Damages 40,150$
Assumed . . .
• Constant sales
• Industry average royalty rate
• No changes during term
© CONSOR 2011
Case: Alternative Royalty Rate Analyses
22
• Value of trademark and related brand assets to a partner business?
• Method Applied: PV of license-derived economic benefits
• Subject IP did not resemble comparable IP transactions
• Parties had a standing relationship
Ranges observed in Comparable Transactions
© CONSOR 2011
Case: Alternative Royalty Rate Analyses
23
Surveys and Comparable Transactions are not The Only Tools Available
Royalty Rate Build-up Method: BVEq
CBV Core Brand Value 1.0 2.0
IVE 1 Sub-brands 0.0 0.0
IVE 2 Global Brand Marketing 0.1 0.1
IVE 3 Incremental Sales for Licensee 0.1 0.1
IVE 4 New Product Development 0.2 0.3
IVE 5 Other Brand Assets 0.1 0.3
Total 1.5 2.8
Range (%)Brand Value Components
BVEQ= CBV + (IVE1 + IVE2 + …. + IVEN)
© CONSOR 2011
Period 0 1 2 3 4 5
Licensee Sales 1,024 1,229 1,290 1,322 1,356
Annual Royalty Rate 8.0% 5.0% 5.0% 3.0% 3.0%
Licensee Benefits
Up-front Payment (50)
Additional Margin 52 179 205 210 215
Annual Fee (5) (5) (5) (5) (5)
% of Sales Royalty (82) (61) (65) (40) (41)
Total Benefits (50) (35) 112 135 165 169
Present Value @ 16% (50) (30) 83 86 91 81
Value of IP to Licensee 261
Licensor Benefits
Up-front Payment 50
Promotions Commitment (10) (10) (5)
Annual Fee 5 5 5 5 5
% of Sales Royalty 82 61 65 40 41
Total Benefits 50 77 56 65 45 46
Present Value @ 13% 50 68 44 45 27 25
Value of IP to Licensor 259
Case: Reflecting Reality
24
Take-away: “Hypothetical Negotiation” Drives Greater Analytical Burden
© CONSOR 2011
When Valuation Issues Arise?
25
Question Answers
Why is valuation needed? Transaction, Infringement, Financial Reporting, Tax/Transfer, etc.
What level of value? MVIC, MVE, Minority Interest
Who will use the value result? Accountants, IRS, Potential partners or investors, Management, other
What information is available? Audited financials, business plans, industry studies, etc.
What types of assets exist? Tangibles, know-how, brands, patents, designs, relationships, etc.
© CONSOR 2011
The Valuation Answer
26
Reconcile results from multiple approaches
Reconcile the calculations to the context
There Are No Valuation Answers: Only Good Choices
Context + Time = Value
© CONSOR 201127
HandoutsLaw 360 on Rules of Thumb
Considerations for Hypothetical Negotiations
20 Licensing Structure Alternatives
Criteria for Comparable Transactions
© CONSOR 2011
CONSOR’s Services
29
www.consor.com
• Valuing patents, trademarks, copyrights, trade
secrets, celebrity rights, and technology
• Helping businesses understand the value of
their IP
• Valuation for transactions, tax purposes,
litigation, licensing deals, and more
IP Valuation
858 454 9091
• Assisting attorneys with damage calculation
parameters & case strategy
• Proven success as expert witnesses
• Economic damages in litigation
• Federal, state & international experience
• Arbitration, and mediation
IP Litigation Support
• Assisting clients in maximizing the licensing
value of their IP assets
• Develop licensing strategies, execute, negotiate
license agreements
• Licensing experts in litigation
• Evaluate financial and economic commitments
of a potential transaction
Licensing Consulting
• Maximize the value of bankrupt assets
• Identify valuable IP in bankruptcy
• Market and sale of bankrupt IP assets
• Value and dispose of intellectual property
IP Transactions