2. Intellectual Property Valuation
Zach Eubank, JD, MBA, CVA
July 17, 2017

3. Introduction Zach Eubank Director
RSM Valuation Services / Des Moines, IA
Business Valuation

4. Table of Contents Intellectual Property Valuation
Introduction to Intellectual Property Valuation 4
IP Valuation Process 13
Traditional Valuation Methodology 18
Valuation of Various Types of Intellectual Property 24
Valuation of IP in Varying Contexts 31
Q & A 36

5. Introduction to intellectual Property

6. IP Landscape
IP and intangible assets represents approximately 80% of the corporate value in the US
Stock prices reflect the importance/value of all intangible assets (including IP)
Almost every industry currently relies on a significant number of IP and intangible assets

7. IP Landscape (continued)
The generation of patented technology is accelerating
Commercialization of IP accounts for several trillion dollars in revenue annually.
Licensing intellectual property is a core strategy for many companies

8. IP Valuation Process

9. IP Valuation Process Overview
The steps for completing a valuation of an intangible asset or asset bundle are generally as follows:
Define the engagement
Gather the information on the subject asset
Analyze the information
Determine indication of value for the subject asset
Communicate the results to the appropriate parties

10. IP Valuation Process – Key Considerations
What context assets or bundles are being valued?
What is the purpose of the valuation? Common reasons for an IP valuation include, among others:
Mergers and acquisitions
Tax-based transfer
Donation
Outright sale
Bankruptcy/reorganization
Litigation or arbitration
Intercompany royalty rates
The specific purpose of the valuation helps determine the applicable standard of value

11. IP Valuation Process – Key Considerations (continued)
When is the asset to be valued? (i.e. the valuation date)
Time-based scenarios will have an impact on value – consider info that is “known” or “knowable” as of the valuation date
Consider the applicable standard of value (e.g. fair value vs. fair market value) & premise of value (e.g. going concern vs. orderly liquidation)
Consider the various valuation approaches and determine which methods are applicable

12. Valuation Methodologies

13. Traditional Valuation Approaches
The four generally accepted intangible asset valuation approaches include:
Cost approach
Market approach
Income approach
Relief-from royalty approach (hybrid approach)
The applicable valuation approach is determined based on the consideration of key facts and circumstances regarding the subject asset

14. Cost Approach Two common variations of the cost approach:
Historical cost basis
Replacement or reproduction cost
Historical cost approach- asset value based on historical costs incurred associated with the asset
Historical costs may include items such as:
Legal fees
Application fees
Personnel costs
Production costs
Development costs
Replacement/reproduction cost- value based on current costs required to duplicate the asset today. Incorporates adjustments reflecting inflation/deflation
Cost approach provides the absolute minimum value, does not reflect economic benefit to the owner
Appropriate approach when no specific market application or benefit can be identified

15. Market Approach
Assets are valued by comparing to recent sales or other transactions involving similar assets in the market
Utilizes actual transaction values derived from sale or licensing agreements
Practical, logical approach when market data is available
Considered the most direct and systematic approach when reliable data is available
Active market and/or reliable data may not exist in many cases

16. Income Approach
Based on expected future income streams related to the asset
One of the most widely used approaches when valuing intellectual property/intangible assets
Inputs can be relatively accurate and obtainable
Important to distinguish between cash flows associated with the enterprise vs. cash flows associated with a specific IP asset
Value of the asset is based on the present value of future economic benefits (cash flow)
The significant inputs required to utilize the income approach include:
Future income stream
Duration of the income stream
Risk associated with the generation of the income stream (discount rate)

17. Relief-from Royalty Approach
Common approach for valuing IP
Incorporates aspects of the income approach and market approach
Value of the asset is based on the present value of royalties avoided due to ownership of the asset
Selected royalty rate is based on marketplace transactions of similar assets
Often used to establish damages in litigation cases
Inclusion of market information adds credibility to the analysis

18. Valuation of various types of intellectual property

19. Trademark Valuation
Initial assessment should be performed to determine if value exists:
Does the trademark differentiate the product/service with which it is associated?
Would others (third parties) be interested in using the trademark?
Would third parties pay a fee to license the trademark?
If the answer is “yes” to these questions, then there is value.
Question then becomes how to determine/quantify the value of the asset
Context and time-frame in which the asset is being valued is critical to the valuation process

20. Trademark Valuation (continued)
Cost approach- not commonly used when valuing trademarks. Historical costs does not necessarily represent “value”
Income approach- can be utilized if an income stream directly attributable to the asset can be identified. Variations of the income approach include:
Cost savings method
Relief-from royalty method (also considered a market approach)
Allocated earnings or excess earnings method
Market approach- most consistently used method to value trade names
Comparative in nature, premised on law of substitution
Requires knowledge of comparable sales and licensing agreements

21. Additional key valuation considerations:
Patent Valuation
Initial assessment should be performed to understand the stage of development
Additional key valuation considerations:
The uniqueness of the patent or technology
The depth of the patent/technology
Competing or existing technology
Time & effort to commercialize the technology
Ability to protect the patent
Size of the market and future prospects for that market

22. Patent Valuation (continued)
Cost Approach- seldom used to value patented technology unless the asset is in very early stages of commercialization
Income Approach (excess earnings method)- appropriate if the patent is fully developed or mature technology
The relief-from royalty approach may be utilized if the technology is ready to go to market and an income stream can be identified
Market approach- may be utilized if a market for similar technology exists. Finding appropriate comps can be problematic

23. Trade Secret Valuation
Cost approach is not appropriate given the nature of a trade secret
Market approach- not practical as an active market for a similar trade secret rarely exists
Income approach- Appropriate approach is to use the net present value of future cash flows
Inputs required to determine the NPV of future cash flow:
Total amount of future cash flow
The discount rate/required rate of return
The probability that the cash flows will occur

24. Valuation of copyrights falls into three categories:
Copyright Valuation
Valuation of copyrights falls into three categories:
Traditional valuation (tax or financial reporting)
Transfer pricing
Litigation (damages)
Copyright value is based on the following components:
Current value of the IP based on sales/licensing fees
Possible future new uses of the IP
Copyrights can be valued using any of the four traditional valuation approaches

25. Valuation of IP in Varying Contexts

26. “Value” has many definitions depending on the context of the valuation
Fair Value
“Value” has many definitions depending on the context of the valuation
Accounting definition under ASC 820
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Legal definition
The definition varies from jurisdiction to jurisdiction as specified in state statutes and developed in the state’s case law precedents.

27. Fair Market Value – 2 definitions
The price at which the property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell: both parties having reasonable knowledge of the relevant facts. [Revenue Ruling 59-60]
The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller acting at arm’s-length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts. [IGBVT]

28. Intrinsic Value and Investment Value
The value of a prudent investor considers using available facts
Does not reflect the current market, but what the market will eventually realize
Investment Value
The value to a particular investor based on individual circumstances and expectation of that individual investor

29. Summary of Different Values
The type of engagement (litigation, financial reporting, etc.) impacts the applicable standard of value. The value may be different depending on the standard of value. It is important to understand the nature of the project and to understand the unique differences under each standard of value.

31. Sources of Information
American Society of Appraisers, BV301- Valuation of Intangible Assets
Intellectual Property Valuation: A Primer for Identifying and Determining Value. Chicago, IL: American Bar Association, Section of Intellectual Property Law, 2005
"Intellectual Property: Valuation, Exploitation, and Infringement Damages”. Russell L. Parr, Gordon V. Smith
International Glossary of Business Valuation Terms
IRS Revenue Ruling 59-60

32. RSM US LLP
400 Locust Street, Ste Des Moines, IA