IP Valuation September, 2011 - PowerPoint Presentation

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IP Valuation September, 2011

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CONSOR Intellectual Asset Management

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Why IP Valuation?

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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 ownershipImprove performance Collateralization

Context

Purpose

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What is IP?

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Intellectual Property vs. Intangible Assets

Bundles of IP and IA Assets

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Context: Property Types

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IA vs. IP: Commercialized Separate from Other Assets

Internet Assets

Data Bases

Intellectual Properties

Intangible AssetsCustomer & Vendor RelationshipsPatentsCopyrights

TrademarksTrade SecretsProprietary Systems

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IP Property Types

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Bundles of Intangible Assets (IA),

each contains Intellectual Properties (IP)

Marketing

Relationship

(Customer / Supplier)TechnologyContract

Marks, brands, names, domainsTrade-dress, packaging, logosNon-competes, key-personCustomer / Supplier relationships Distribution networksOrder backlog

Technologies, know-how, systems, methods

Patents, software, recipes, content, databases

License / royalty, lease, franchise

Permits, use rights, broadcast rights

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Valuation Methodologies

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Economic principal of substitution

Measures expense required to replace

Neglects future benefit

Present value of future economic benefitRequires projections and a risk assessmentRequires allocation of benefit specific to the asset

Value based on price of similar assetsRequires suitable comparable assets

DescriptionReplication / replacement feasibleBenchmarking

DCF

Relief from Royalty

Comparable transactions

Benchmarking

Application

Valuation as Art and Science

Cost

Income

Market

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Valuation Tools of the Trade

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Discounted Cash Flow Models

Comparable Valuation Ratios

Replacement Cost

Relief from RoyaltyAllocation / Excess Earnings

Option ModelsProprietary ApproachesThe “Science” of Valuation

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Changing Valuation Terminology

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MVIC

= Assets + Liabilities

MVE= Equity OwnershipMinority InterestsLevel of Value

Value DefinitionsFair Market ValueFair ValueStrategic ValueLiquidation ValueDefining the Assignment to Avoid “Bad Art” Who’s Setting Standards?

AICPA, ASA, ISO, NACVA, IRS, Courts, FASB, LESI, and more

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Case: Improper Use of a Character

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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 appliedIncome approach calculation yields different value than market and cost approaches

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Case: Improper Use of a Character

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Case Take-away: Context is Key

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A more complex case showing

the importance of Context, and

the importance of identifying IP

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Case: Identifying IP

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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 agencyState accuses client of gouging the parties it serves

Has Client developed IP that justifies the excess profits?

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Case: Identifying IP

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Case: Identifying IP

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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 methodsRelationships / key people

(can’t be commercialized)History / Longevity / 1st to Market (can’t be commercialized)IA at the CLIENT

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Value Constraints

15Present Value of Expected Future BenefitValue of Business=

Tangible Assets

Intangible Assets

=

=Tangible AssetsIntangible AssetsBrand / Trade Names

Intellectual PropertiesCould 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

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Case: Impact of Context

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Frequent Context for IP Valuation: Purchase Price Allocation

(FAS 141/142)Purchase Price Creates GoodwillWhat 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?

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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 flowCase Take-away: Context is key / Context Can Be Forced on the Value Analyst

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What if the Context Changes?

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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?

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What if the Context Changes?

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IP Valuation Methodologies

Comparable Transactions

Relief from Royalty

Discount Future BenefitReplacement 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

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Hypothetical Agreements

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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 thumbIf it’s a universal norm, it can’t meet the criteria for comparables

This Shouldn’t be ShockingNo More Rules of Thumb

Licensing agreement = contractual financial agreementCommitments can and do take many formsHypothetical agreements must reflect their real-world counterpartsReplacing Rules of Thumb

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Reflecting

Real-world Complexity?

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Did Consider . . .

Forecast benefit (sales, term)

Industry dynamics (rate)Risk assessment

A Typical Relief From Royalty Calculation

Assumed . . . Constant salesIndustry average royalty rate No changes during term

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Case: Alternative Royalty Rate Analyses

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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

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Case: Alternative Royalty Rate Analyses

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Surveys and Comparable

T

ransactions are not The

Only Tools AvailableRoyalty Rate Build-up Method: BVEqBVEQ= CBV + (IVE1 + IVE2 + …. + IVEN)

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Case: Reflecting Reality

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Take-away: “Hypothetical

N

egotiation” Drives Greater Analytical Burden

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When Valuation Issues Arise?

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Question

Answers

Why is valuation needed?

Transaction, Infringement, Financial Reporting, Tax/Transfer, etc.What level of value?MVIC, MVE, Minority InterestWho will use the value result?Accountants, IRS, Potential partners or investors, Management, otherWhat information is available?Audited financials, business plans, industry studies, etc.What types of assets exist?Tangibles, know-how, brands, patents, designs, relationships, etc.

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The Valuation Answer

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Reconcile results from multiple approaches

Reconcile the calculations to the context

There Are No Valuation Answers: Only Good Choices

Context + Time = Value

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Handouts

Law 360 on Rules of Thumb

Considerations for Hypothetical Negotiations

20 Licensing Structure Alternatives

Criteria for Comparable Transactions

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Discussion

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CONSOR’s Services

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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