AN OVERVIEW OF IP ASSET VALUATION

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AN OVERVIEW OF IP ASSET VALUATION

• Valuation of Intellectual Property Assets
• Christopher M. Kalanje, Consultant, Creative
  Industries Division, WIPO

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IP VALUATION

• Valuation is a process of determining value or
  worth of an asset
• Valuation often combines objective and subjective
  considerations
• IP valuation is a relatively new area
• IP valuation is triggered by various factors

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IP Valuation contd.

• A Final valuation would depend on the following
  basic premises of value
• Value in exchange worth of the underlying IP
  asset in terms of its capacity to be exchanged in
  terms of money
• Value in continued use worth of the underlying
  IP asset to its owner on the basis that it
  continues to generate income to the owner

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IP Valuation contd.

• Acquisition value strategic potential of the
  underlying IP asset e.g uses in M A
• Value in place worth of the underlying IP asset
  as it is. i.e. the said IP asset is not in
  current use in the production of income

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Value Basis of IP Assets

• Traditionally IP assets were treated as Goodwill
• Goodwillthe amount paid for a business in excess
  of the fair value of its identifiable net assets
  at the date of acquisition (see Peguin dictionary
  of accounting)
• Advent of knowledge economy and high market value
  of companies as opposed to book value enhanced
  interest on value of IP

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Value Basis of IP Assets contd.

• IP assets have distinctive characteristics which
  makes it possible to value them separately from
  other intangible assets
• These characteristics include
• Independently identifiable
• Legally protected and enforced
• Transferable
• Economic life

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Value Basis of IP Assets contd.

• Factors influencing value of IP assets
• High price
• Large potential market
• Strong IPR (well written claim)
• Exclusive license
• Stage of technology (e.g. invention near
  commercialization stage)
• Option on leveraging

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Value Basis of IP Assets contd.

• Low price
• Non-exclusive license
• Huge investments needed
• Still far from commercialization (needs further
  development)
• No option for sub-licenses

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IP Valuation Triggers

• As IA in particular IP take the central stage in
  determining the value of enterprises decision
  makers have to answer the following
• Are returns on RD satisfactory?
• Are patents worth renewing?
• Are brands worth defending? etc.

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IP Valuation Triggers contd.

• Enterprises need to formulate a strategy which
  would make IP assets more profitable
• IP valuation is imperative in facilitating
  decision making process on strategy to pursue
• Several factors (triggers) lead to IP valuation

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IP Valuation Triggers contd.

• These include
• Sale or Purchase of IP Assets
• Licensing
• Merger Acquisition
• Cost saving
• IP asset donation
• Joint venture arrangements/strategic alliances
• Financing

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Methods of IP Assets Valuation

• Valuation models may be broadly divided into two
• Static models
• Estimate value of accumulated intellectual assets
  at a point in time
• Does not differentiate temporal differences in
  the accumulated IP
• Does not differentiate the differences among
  different categories of IA at the time of
  valuation

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Methods of IP Assets Valuation contd.
Static valuation models
Mkt value - Book value model
More info Valuation of Intellectual capital and
Real Option Models by Sudarsanam, S. et
al http//www.realoptions.org/papers2004/Sudarsana
mIntellCap.pdf
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Methods of IP Assets Valuation contd.

• Dynamic models
• Take into consideration the temporal difference
  in the accumulated intellectual assets (e.g. time
  value of money and riskiness of the forecast cash
  flow)
• Value investments in intangibles each at a time

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Methods of IP Assets Valuation contd.
Discounted Cash Flow
Dynamic Models
Real Option Models
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Methods of IP Assets Valuation contd.

• Basic Methods
• Cost Approach Estimates the value of underlying
  IP asset basing on historical cost incurred in
  developing the asset
• Replacement cost
• Reproduction cost

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Methods of IP assets Valuation contd.

• Market Approach (sales comparison approach)
• Based on the value of similar or comparable
  assets that have been exchanged, at arms length,
  in active market
• second variant uses standard industrial royalty
  rates

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Methods of IP assets Valuation contd.

• Income Approach Based on the income-producing
  capability of underlying IP asset
• Seeks to establish the net present value (hence
  use of discounted cashflow)
• Decision tree analysis (DTA)-based on an
  underlying DCF analysis and moves further to take
  into consideration flexibility available.

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Methods of IP assets Valuation contd.

• Net present value
• Calculating the future value of intellectual
  asset (investment) at present time
• NPV A(1 r)-n i.e. NPV A1/(1 r)n
• where NPV net present value (i.e. DCF)
  A amount expected at year n r risk factor

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Methods of IP assets Valuation contd.

• Other IP valuation methods include
• Monte Carlo simulation analysis
• Option pricing theory

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Accounting Challenges

• Rationale behind Accounting
• Historically evolved to report tangible
  assets/liabilities
• Quantitative stock of performance
• Documentation of past financial position

• Impact on Type of Language developed for IP
• Silence about a lot of a firms IP due to
  inherent definitions and assumptions in
  accounting

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Accounting Challenges contd.

• Rational
• Factual, precise, objective,
• comparable information
• Determines perception of a firms management
  and other market participants

• Impact on Type of Language developed for IP
• Internally and externally generated IP is treated
  differently
• Goodwill

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Finally
Thank you for your kind attention
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Methods of IP assets Valuation contd.
MODERN VALUATION ANALYSIS IS EFFECTIVELY DCF
APPLIED TO THE BUSINESS ENTERPRISE UNDER
CONSIDERATION

• The Net Present Value (NPV) of a strategy or
  business is the sum of its expected free cash
  flows to a horizon (H) discounted by its cost of
  capital (r)
• NPV Year 1 Cash Flow Year 2 Cash Flow ... to
  say Year 5 Cash Flow
• (1 r)
  (1 r) ² (1
  r)H
• PLUS
• The terminal value which is the value of the
  business at a horizon (HV)
• HV Cash Flow
• (r - growth)
• Also discounted back to present value
  

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Methods of IP assets Valuation contd.

• Trademark remaining useful life continue in
  perpetuity after after period 5
• economic income (royalty income) grows at 3
• 15 is risk-adjusted discount rate

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Methods of IP assets Valuation contd.