IP VALUATION-alisha

Presented by: Bhumika

Introduction
Intellectual property (IP) valuation is considered as one of the
most important management strategic issues
It plays a key role in many areas of finance such as buy/sell,
solvency, merger and acquisition.

Rationale
It is prepared for transactions, pricing and strategic purposes,
financing securitization and collateralization, tax planning
and compliance, and litigations support.

Driving factors of IP
Intellectual property derives its value from a wide range of
significant parameters such as market share, barriers to
entry, legal protection, IPs profitability, industrial and
economic factors, growth projections, remaining economic
life, and new technologies.

APPROACHES OF IP
VALUATION
1. Traditional

Valuation Process
The valuation process necessitates gathering much
more information as well as in-depth understanding of
economy, industry, and specific business that directly affect
the value of the intellectual property. Therefore, such
information may be gathered from external and / or internal
sources. Finally, the information is devoted to be turned into
financial models to estimate the fundamental value of a
particular type of intellectual property based on such
adapted International Valuation Standards.

VALUATION STANDARDS

Uniform Standards of Professional Appraisal Practice (USPAP)

International Valuation Standards Committee (IVSC) (50 Countries)

US Generally Accepted Accounting Principles (GAAP)

International Financial Reporting Standards (IFRS)

Financial Accounting Standards Board (FASB)

The valuation analysts use numerous approaches in order to reach a

reasonable indication of a defined value for the subject intangible
assets on a certain date which is referred to as the valuation date.
The most common approaches to estimate the fundamental or fair
value of the intellectual property are defined as the following:

Cost approach
Market approach
Income approach
Direct approach
Pay-off approach

Cost Approach
Cost approach
The cost approach is based on the economic principle of
substitution. This principle states that an investor will pay
no more for an asset than the cost to obtain, by purchasing
or constructing, a substitute asset of equal utility. There are
several cost approach valuation methods, the most
common being the historical cost, replacement cost, and
replication cost.

Market Approach
Market approach
The market approach is based on the economic principle of
competition and equilibrium. These principles conclude that, in
a free and unrestricted market, supply and demand factors will
drive the price of an asset at equilibrium point. Furthermore, it
provides an indication of the value by comparing the price at
which similar property has exchanged between willing buyers
and sellers. Data on such similar transactions may be accessed
in several public sources, including specialized royalty rate
databases.

Income Approach
Income approach
This approach estimates the fair value of intellectual property
by discounting the future economic benefits of ownership at
an appropriate discount rate.

Direct Approach
Direct approach
The direct approach is based on the current value of shares of
intellectual property in an Intellectual Property (IP) Share
Market.

Pay-off Approach
Pay-off approach
Using the pay-off method on top of the four above mentioned
methods is a way to enhance the valuation and analysis of
intellectual property

NEW TECHNIQUESbhumika

Continuing developments
Some things in life offer the luxury of one size
fits all, however, the orthodox valuation
measures that most of us are familiar with
namely the income, market, and cost
approach are often modified even slightly
to meet the needs of both the IP that is being
measured, the data available, as well as the
context of the valuation.

GROUP A

Brand Contribution
Methodology

The Brand Contribution Methodology is another market-based methodology

for valuing IP. The contribution made by the brand may be separated from
the profit contributed from other elements of the business in multiple ways:
1) comparing costs charged by a manufacturer and distributor of the
unbranded equivalent (also known as the utility product); 2) if one
eliminates the value added by other assets, the appropriate return on
capital employed with respect to the product may be deducted (this
includes assets such as physical distribution systems, fixed assets, etc.); 3)
the rate of return (or profitability) of the business can be compared with
the rate of return of a comparable unbranded business (which is known as
the premium profits method); and 4) comparing the premium price earned
by the brand over the retail price of its comparable generic equivalent
(known as the retail premium method).

Replacement Cost
When using the Cost Approach to value an intellectual asset, two separate
methods under the cost approach shall be considered: the Replacement
Cost method and the Reproduction Cost method. The Replacement Cost
method aggregates the amount of money necessary to develop a
replacement of the IP that provides the same functionality or utility, in the
same stage of development as the IP being valued, as of the valuation
date. It is important to note that the Replacement Cost measures the
amount of money in todays dollars, rather than the amount of money that
was spent historically to develop the IP so inflation is accounted for. The
logic behind this method is to calculate the amount, in todays dollars, to
provide an equivalent substitute. Finally, calculating the cost of an IP using
the Replacement Cost method excludes the costs associated with any
failed or ineffectual models.

Reproduction Cost
The Replication Cost method is very similar to the
Replacement Cost method, but differs slightly in that it
measures the aggregate costs necessary to develop an
exact duplicate of the IP being valued, in the same stage
of development as the IP being valued, as of the
valuation date. Just like with the Replacement Cost, this
calculation is done in todays dollars to appropriately
factor in for inflation. And unlike the Replacement Cost
method, the Reproduction Cost method includes costs
with associated prototypes.

Technology Factor Method

As the number of digital intangible assets rise, using The Technology
Factor Method becomes all the more common because it is
applicable only to technology. By measuring a technologys
contribution to a business total revenue, an assets value can be
determined. Specifically, the Technology Factor Method is another
method that is similar to the DCF method with respect to the
calculation of an IPs risk-free net present value. Once the NPV has
been calculated, it can then be multiplied with an associated risk
factor (what we will refer to as the technology factor). The
Technology Factor value incorporates the intellectual propertys
strengths and weaknesses associated with the related legal, market
and economic risks.

Venture Capital Method

Analyzing the value of future cash flows over an assets life is a common
technique used to value intellectual property, which is precisely how the
Venture Capital method works. Although similar to the common DCF
method, it is different in that a fixed, non-market based discount rate is
used (generally, a rate of between 40 to 60 percent used). Additionally, no
specific adjustment is made to account for the probability of success (e.g., a
patents success). Unfortunately, the Venture Capital methods weakness is
such that it does not account well for specific risk factors associated with
patents. Moreover, it assumes cash flows are static and the independent
risk factors (new patent issuance, patent challenges or declared in valid,
patent infringement suits, trade secrets, foreign governments failure to
comply with Patent Cooperation Treaties, etc.) are marshaled. It is the
simplicity of this method that harms its accuracy/credibility.

The Concept of Relative Incremental Value

This methodology works when one is trying to
represent some percentage of value of an
individual asset that is associated with a larger
trademark or patent portfolio. For example, if an
underlying trademark or brand has a value of $100
million, and the domain name associated with it is
generating 10% of revenues (e.g.), then one can
allocate a relative value of 10% of the total or, $10
million dollars for the domain name.

Decremental Cost Savings Valuation

This is the method that quantifies a decrease
in the level of costs being experienced by
the IP owner / operator. If, in fact, the IP
owner can quantify lower levels of capital or
operating costs connected directly with the
ownership of the IP; then those lower costs
can be a direct measurement of the value of
the specific IP.

Enterprise Value Enhancement-anulika

Enterprise Value Enhancement: The valuation analyst
establishes the value of the IP owners overall
business enterprise value as a result of owning the IP
and then compares that to the business enterprise
value if the owner did not, in fact, have or control the
IP or was not able to use it in its business enterprise.
The value of the IP then would be the difference
between the total business enterprise value and the
business enterprise as calculated without the IP.

Income Capitalization or Direct Capitalization

Methodology
Income Capitalization or Direct Capitalization
Methodology: This is a method sometimes used to
estimate the value for intellectual property that has no
predetermined statutory expiration (like trademarks)
and for which net income (royalties or profit) is not
expected to vary greatly over time (due to
contractually-defined license fees, for example). This
involves taking an estimate of expected annual royalty
stream (or profit) and multiplying this amount by a
factor known as the capitalization rate.

Imputed Income Analysis

Imputed Income Analysis: A subset of traditional income
approach methods, this imputed income analysis can be
used quite effectively in valuing a domain name or sub brand
attached to a trademark; or in valuing flanker patents for a
core patent portfolio. In the case of a domain name, value is
established by looking at the activity generated by the
domain name and associated website assets, relative to the
overall value of the core trademark and brand bundle.
Therefore, one is able to estimate through imputation the
relative value of a domain name to its parent trademark.

Income Differential Analysis

Income Differential Analysis: This particular
variation simply means that a company
manufacturing and selling a product with a
particularly strong trademark or unique
technology will receive more income than a
competitive company producing the same
product but without the addition of the
specific IP, such as the trademark or patent.

Liquidation Value:
Liquidation Value: Found most often in bankruptcy
situations, as the name implies liquidation value
for any piece of IP is the lowest price that the
asset is virtually guaranteed to be sold in a
distressed situation. Used almost solely in
bankruptcy, other distressed situations or time
critical contexts, litigation value scenarios arise
most often in a Chapter 7 bankruptcy.

Premium Pricing Analysis

Premium Pricing Analysis: Of all the variations to the
income approach, this is perhaps the most easily
understood because the value of an asset is
established by looking at the difference in the price
that it can command in the market, typically at
wholesale, compared to the average product in the
market. The difference between these two prices is
the price premium. This, then, is projected out on an
annual basis and a net present value established.

Profit Split Methodology

Profit Split Methodology: A form of the income approach, it
can be tricky to apply accurately: because the profit split
method attributes a share or portion of a companys
profitability to a particular intangible asset. This method
requires that the valuation analyst have the ability to
understand the IP to such an extent that he or she can
isolate and expressly separate the intangible assets profit
generation potential from all the other business assets and
then allocate that portion of profit split to the companys
operations and capitalize that value over a number of years.

GROUP B

Auction Method-shivani
There are several market-based methods of valuing IP
using recent comparable or similar IP transaction
between independent parties (arms-length
transactions). One of these methods is called the
Auction Method. If a hypothetically perfect auction
market existed, several potential buyers that each had
all available information regarding the IP would compete
with each other to bid on the IP. Through this auction
process, a market-based price of the IP would be
determined through bidding.

DTA (Decision Tree Analysis) Based Methods

While many people are familiar with the DCF methods of
valuing intellectual property, it comes with inherent
weaknesses because it relies on selecting discount rates
appropriate to the risk associated with the various stages in a
propertys life. Not only does it require calculating the possible
cash flows which might occur, DCF methods do not account for
the various possibilities open to project managers (for
example, the levels of risk if a patent lapses or is abandoned at
differing stages along the process). Unfortunately, there is no
exact science to be applied for these and experience is
necessary to influence these decisions.

Assumptions can be built into the DCF model in an attempt

to account for the possible outcomes as the result of
management decisions. Using what is known as Decision
Tree Analysis, a limited number of such managerial
decision possibilities can be accounted for. It is important
to note, however, that the Decision Tree Analysis should
be based on an underlying DCF analysis of each branch.
The recommended way to perform such analysis is to
begin with the final decisions and work backwards in
time, which will result in a present value.

The Decision Tree Analysis

Method

The Decision Tree Analysis Method offers a big

advantage over the DCF analysis: it factors the
value of flexibility associated with a project.
However, assumptions still need to be made
regarding the discount rate (as does the DCF
method). It is important to use a discount rate
appropriate with the level of risk involved at each
stage of a managerial decision associated with the
development of a brand or IP.

The Brand Value Equation Methodology

The Brand Value Equation Methodology (BVEQ): In
this methodology, a core value for the trademark is
calculated, and then each of the individual other
assets attached to the core asset have their values
calculated. Therefore, the sum of the core brand
value plus the incremental assets becomes a total
brand value. Expressed in an equation it as follows:

BVEQ = CBV + IVE1 + IVE2 IVEn

The Competitive Advantage Technique

The Competitive Advantage Technique: This
technique is best used when the subject
company has a complex portfolio of
intellectual property and works on the
supposition that the IP is giving its owner an
advantage over its competitors because of
proprietary patents, technology, trademarks,
software or other intangibles.

Monte Carlo Analysis of Value

Monte Carlo Analysis of Value: This is a method to
evaluate how possible future outcomes can affect
the decision of whether or not to use a new piece
of IP based on possible value remember that this
methodology is most useful in valuing early stage,
non-commercialized technology; and, in particular,
where there are many unknowns and numerous
scenarios about the future development of the
technology.

Options Pricing Technique (The Black-Scholesnancy

Options Pricing Technique (The Black-Scholes): Patent licensing
shares at least one attribute with all other relevant business
decisions: it involves risk. Where decisions involving financial risk
are concerned, sound management principles suggest considering
ways and vehicles to hedge that risk. One of the central vehicles to
hedge risk in modern finance is an Option. A patent can be seen
as the right to invest in or to license (or enforce through litigation)
an underlying technology or product line, during the term of the
patent. Therefore, an un-commercialized patent can be valued from
this options perspective using, for example, methods such as
those derived from the famous Black-Scholes model.

Snapshots of Value
Approach

Snapshots of Value Approach: This is similar in nature to

the business enterprise value approach in that the
snapshots value is based on establishing two different
values for a company: one, based on the assumption
that the company has full access to the ownership of
the intellectual property and intangibles, and the
second snapshot of value based on the fact that the
company does not have these assets. Measuring the
difference between the two snapshots establishes the
value of the IP or intangible asset portfolio.

Subtraction Method of Value or Benchmark

Method of Value
Subtraction Method of Value or Benchmark Method
of Value: Establishing the value of a company
against another company by comparing them on a
so-called benchmark basis is the premise of this
method of value. In one instance, the benchmark
value will be a company that owns a particular
trademark or patent and the second value for a
comparable company that does not have that
same asset.

The ValCalc Methodology

The ValCalc Methodology: A proprietary approach
employed by our firm, it is a variation on the return
on assets employed approach (see above). ValCalc
establishes the economic return that each
intangible asset class should be earning.
Calculations of adequate return are applied also to
all classes of tangible assets within a company.
Then the return for each intangible asset is
calculated as a result.

Valmatrix Analysis
Technique

Valmatrix Analysis Technique: This proprietary system

was developed by our firm more than two decades ago
and employs a matrix of the twenty most important
predictors of value for a trademark, patent or piece of
software. The predictors for each of these types of IP
are, of course, unique. They are used in a common
manner, however: To score a given IP asset against its
peers on a numerical scale. Value is therefore
established relative to similar trademarks or patents.

CONCLUSION
Valuing and analyzing intellectual property is still at a
premature stage, the field itself hardly more than a few
decades old. As the process continues to evolve and
experts refine a multitude of methodologies, the art of
valuing IP will continue to witness developments,
innovation, revision, and diligent progression of
techniques to value intellectual property and intangible
assets. In all probability, the techniques listed above will
either be outdated or refined further to become industry
standards.

Thank you !