ip valuation

IP Valuation

@ IIMB, 14th December 2012

Anjana Vivek

[email protected]

VentureBean Consulting Private Limited

Background

Valuation methods

Practical perspectives: In pricing

Cases for discussion

Summary

Agenda

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Intellectual Property

• Intellectual property has many forms, visible and invisible…

– Patents

– Trademarks

– Industrial designs

– Service marks and commercial names

– Copyright

– Formulae

– Knowledge (people)

….and so much more

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Why Value

When do you think IP is to be valued?

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Why Value

To

• Purchase

• Sell

• Plan for the future

• Report

• Evaluate value of work in progress

• Take decisions

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Background

Valuation methods



Summary

Agenda

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Valuation methods

These can be broadly classified into:

• Cost based

• Income based

• Market based

• Special: qualitative based; other

• Contingent claim (options)

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Valuation methods

• Different experts have different classifications

of the various methods of valuation

• Within these methods, there are sub-methods

• Sometimes the methods overlap

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Valuation process

• Review and selection of the method(s) of

valuation

• Understanding of issues which impact valuation

• Special situations and their impact on valuation

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IP value

The value of the IP is from

• Economic benefit provided

• Specific to business or usage

• Has different aspects

– Accounting (book-linked) value

– Economic (market-linked) value

– Technical/Scientific (R&D-linked)value

– Strategic (usefulness /specific purpose)

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Depends on objective and can vary widely depending on purpose

• For decision making

• For accounting purposes – to show in financial statements and reports to management

• For reporting, internal/external

• For taxation purposes

• For sale/purchase

• For acquisition/merger

IP value

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Valuation - Cost

Historical cost

• Costs associated can be identified with the IP

– direct, indirect; material, labour, expenses

• Subjectivity is however there in some areas

– Period for which costs should be accounted

– Which costs are to be included, which to be

excluded, some costs are incurred for multiple IPs

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Valuation - Cost

Replacement cost

• Assign costs for different characteristics, eg. for a geography, exclusivity, automatic upgrades etc.

• Decisions on whether IP can be replaced

• Comparable purchase cost may be taken as a benchmark

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Valuation - Cost

Challenges and Issues

• Difficult to estimate at times– How does one unbundle IP and non-IP costs

– Allocation of direct and indirect costs

– All costs may not be captured as books of account typically capture costs relate

• Some costs may have build over many years.. Eg. Brands in existence for decades..

• Cost may not be indicative of income potential

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Valuation – Market price

• Linked to deals and transactions in market-place in recent times

• Sometimes this may be based on multiples like M&A enterprise valuation

• May involve comparing of IP assets and deals involved

• May involve reviewing royalty and licenceterms

• Need to understand features of IP, including territorial rights, exclusivity, time horizon, product features made available etc.

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Valuation – Market price


• Market price of a deal may not necessarily be indicative of value specific to current requirement; for eg. the deal value may have may have depended on some strategic rationale

• How do you get transactions where you can understand the market price (eg. Used cars have a market price, but IP may not)

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Valuation – Income based

• Discounted cash flow is popular

• Difficulty is in separating the income

associated with the IP alone

• Based on future expectations (synergies

/costs saved in M&A)

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Valuation – Income based


• Discounts and multiples are difficult to

estimate

• Depends on scenarios projected, subjective elements are involved

• May depend on business models which could be difficult to think through in sufficient detail in advance

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Valuation – Qualitative

• Linked to key value drivers that are identified

• May be based on a scoring system, i.e for brand value etc. Various parameters are scored and used to determine possible value

• PhD’s in a bio-tech firm taken as an indicator of value

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Valuation – Qualitative


• Identification of key value drivers

• Value drivers may be only a partially indicative of value

• May be subjectivity in scoring, depending on who is doing this, whether an analyst or a technical expert etc..

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Valuation: relief from payment

• Assumes that if IP ownership was with

another company, royalty would have to be

paid for usage of IP

• Value is capitalised value of relief to company

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Valuation: relief from payment


• Difficulties in identification of specific IP

benefit

• Some IPs may not be available readily in

market, to get a payment estimate

• Subjectivity regarding usage and usage terms

and conditions, as some payments are

specific to a case

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Option

• Gives owner right (not obligation)– to buy or sell asset

– at a predetermined price, the exercise price or the strike price

– at or before the expiration of the option

• Right to buy – call option (bc)

Right to sell – put option (ps)

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Option

• Asset pays off only under certain

contingencies:

– for a call option: if value of underlying asset

exceeds pre-specified value

– for a put option: if value of underlying asset is is

less than pre-specified value

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Option

• Can be valued as a function of the following

– Current value

– Variance in value of underlying asset

– Strike price

– Time to expiration of option

– Riskless interest rate

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Option: Applicability

• Contingent value rights providing protection to

stockholders in companies against stock price

declines - options

• Convertible debt - long term call options

• Patent can also be analysed as options on

product - initial outlay considered as the strike

price and the patent life may be likened to time

of expiration of option

• Abandonment of projects - options

Flexibility also has a value -which is captured in the options model

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Options


• Assumption on variance are difficult to defend

when options have long lifetimes

• Value of underlying asset if not traded may be

difficult to estimate

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Background

Valuation methods



Summary

Agenda

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IP value drivers

• Competence of team i.e.

– skill sets

– experience

– educational qualifications, institutes attended

• Projects in pipeline

• Nature of projects – i.e. quality of work done, not

just quantity

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IP value drivers

• Growth in clients/associates due to core IP,

indirectly measuring impact of IP

• Additional efforts required in terms of time, cost

etc

• Period for which benefit can be available

• Risks associated

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IP value capture

• Sometimes, the IP value is not separately

calculated and is instead indirectly factored in

the business, i.e.

– In overall cash flow

– In revenue

– In profits

– As higher multiples compared to other companies

without this IP

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IP Licensing *

• Intellectual property – ie valuable intellectual property must be owned by one party

• A license is a consent by the owner of the IP to allow the use of the IP in exchange for something in cash or kind

• Licenses can have different rights, ie to use, to sell products based on a technology etc.

* Source: Successful Technology Licensing: IP Asset Management Series, World Intellectual Property Organization

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IP Licensing• There is a business relationship in which

multiple agreements may be involved

• An agreement is to be reached on multiple

parameters

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Key items

• Subject matter

– Product, software programme, formulation,

document, set of diagrams etc.

– Sometimes there is a lack of clarity

– It is important to understand and define what

technology is, what the IP is and what is proposed to

be licenced

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Key items• Is item being licensed, completed?

– Questions are to be raised re stage of development of IP, ie whether software has been completely written, whether additional customisation is required, whether a technique has been completely developed etc

– If more work is required, it is to be determined whether the technology is usable in the incomplete form, what additional work is required, what tests need to be passed etc.

– Based on this, the value will be debated upon and the price for transfer will be negotiated

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Key items

• Who owns IP – Is the licensor the owner

– The agreement should specify ownership, particularly in joint venture situations. In such cases, different nationalities may also be involved

• Can the technology be seen in advance– Non disclosure agreements may be signed in such

cases, including place for settlement of disputes, if any

– Information sharing and practical reality are to be balanced

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Key items

• Specific rights

– What are the rights being transferred

– What is not available

– Is what is offered, sufficient for the purpose for

which it is obtained

– Are any additional rights required for your business

– What else is relevant to usage of the IP, such as

training, knowledge of updates and changes, major

findings post agreement which will impact IP etc.

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Key items

• What is the territory of rights

– Is this worldwide or limited to country, region

– Can it be distributed on the internet, in digital form

– Is there exclusivity

• To limit exclusivity, one may limit to dependency on

minimum royalty

• Exclusivity time and term of agreement need not be same

• This may be limited to some technologies, ie “field of use”

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Key items

• Value and pricing

– Depend on nature of license, whether to

manufacture, market, purchase, joint venture etc

– From licensee perspective, affordability, other

costs, price to be charged for product and market

assessment play a key role

– From Licensor perspective, amount that will give

return on investment in R&D to be carefully

computed and understood

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Key items

• Value and pricing

– Valuation methods are used to assist licensor and

licensee in making judgements on pricing

– Several methods exist, but they are subjective and may

sometimes be combined

– Three classic methods are cost based, income based

(most charge between 0.5% to 5% of revenues – thumb

rule, not to be considered rigidly)

– Comparables method, can be particularly difficult to

compare IP & technologies, but can be attempted)

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Key items

• Payment method and terms – Royalties and lump sum payments or a

combination of the two are commonly used

– May be on gross or net revenues, good to get into details

– Licensee may want a cap on the royalty, but licensor may not appreciate this

– Licensor may want a cap on the royalty, but Licensee may not appreciate this

– Lump sum payments may be treated as advance payments or part advance payments

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Key items

• Terms may include performance warranties,

indemnities, representations

• May impact final price of products

• Future products and versions are to be

considered

• Other terms include documentation, consulting,

training etc, which form a key part of the IP

transfer/use

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Background

Valuation methods



Summary

Agenda

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CASES: Case discussion methodology

• Individual thinking – 3-5 minutes– ( no discussions at this point .. No outsourcing your

thinking … )

• Group discussion – 10-15 minutes– Must have a consensus on key points; the team view is

to be arrived at.. Not the individual view

• Joint case discussion with all groups, lead by faculty (30-45 minutes; can go on for more depending on depth of detailing and learning required from session)

• Summarising of learnings from case and linking it to points made in session and additional points

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Case 1

• Your company in India has generated patents which are being used in product development in one country

• Your markets are global, current customers of the product are in three countries

• You are in turn paying a fee to the parent company for use of certain software products, for which purchase is made centrally at the head office overseas.

Q. How will you look at the value of the IP generated in your company

Q. What are the various other issues that you would need to factor in, in addition to valuation?

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Case 2

• A University has developed a technique that they have patented

• They are considering creating a new start-up company, to which the patent can be transferred for commercilization

• They want the inventors and the University to benefit from this

Q. If you are an advisor to the University, what are the issues you will need to consider?

Q. What process will you ask the University to follow?

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Case 3

• A company has developed a set of software products

• The founders of the company do not see eye-to-eye in future growth plans of the business

• They decide to take legal steps to split the company into two, with the existing two Directors, each taking one unit

• The product lines are then split into the two companies

Q. How will you look at the value of the IP generated

Q. How will the value of the two companies factor this

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Background

Valuation methods



Summary

Agenda

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In summary• Understand the need/benefit/rational for

calculation of the IP

• Apply the different methods of valuation, i.e.

income, cost, transaction etc.

• Factor in the legal, accounting, tax and any

other matters while arriving at a value range

• For the negotiations, articulate various

elements such as IP ownership, royalty,

license fee, equity/debt mix, costs, billings,

payouts, earnings etc. and factor these in

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APPENDIX:Net present value

nt

tt

t

r

CFValue

1 )1(

CFn is indicative of earning at a point in time

r is the discount rate

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APPENDIX:CAPM

CAPM model is widely used to calculate cost of

equity capital

• Cost of equity =

Risk free rate + the risk of the company (beta) x

the market risk premium

• Market risk premium =

Market rate – risk free rate

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Expertise

• Strategic and transformation capability - combined with expertise in

operational implementation

• Knowledge of local business conditions - combined with global best

practices

• Structured approach - ex 6 Sigma and Lean methodologies

Working style

• Entrepreneurship and Independence in working style – across levels in the

organization

• Change management is an important part of the work – we work together

with the client

Business Setup

• Team scalability – expertise across business functions

• Innovative business models / frameworks

Consumer / Retail / Food

Banking / Finance ManufacturingIT/IT enabled

servicesTravel &

TransportationEducation Healthcare

VentureBean adds value to clients through…

…across multiple industry verticals

Our professional approach is unique

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•Strategies for business growth

•Governance

•Change Management

•Project and Program Management

•Business and operational Due Diligence

Planning, Change Management,

Integration

•Channel strategies

•Product portfolio Management, and Product Extension

•Value Chain Mapping

•Customer analysis, segmentation and loyalty programs

Sales and marketing effectiveness

•Lean process engineering methods

•Gap-analysis

•Customer focused processesOperation

•Performance Management

•Key talent & change management

•Leadership development based on the Leadership Diamond ™

•Organization Structure for Excellence & Growth

Organizational Development / Leadership / HR

•Strategy, Governance & organization

•Sourcing

•Architecture

•Project Management

IT

•Cost / Overheads Reduction

•Cash-flow Management & Capital Structure Advisory

•Project Evaluation & Risk Management

•Syndication-Debt & Equity

Finance

Cross

functional

expertise

Functional

expertise

Our expertise within various areas…..

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Thank You!

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ip valuation

Economy & Finance

costs relatesome costs

ip direct

indirect costsall costs

pricing cases

different classifications

different characteristics

comparable purchase

indirect material