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CONSOR Intellectual Asset Management
IP Valuation September, 2011 CONSOR Intellectual Asset Management
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Why IP Valuation? Beyond specialized IP law practices,
business, commercial, tax and estate practitioners Increasingly involved in identifying, protecting, applying, and defending intangible assets owned by clients. Context Purpose Value to whom? How much value? How and when does value change? Buy, sell or transfer Disputed ownership Improve performance Collateralization
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What is IP? Intellectual Property vs. Intangible Assets
Bundles of IP and IA Assets
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Context: Property Types
Intangible Assets Intellectual Properties Customer & Vendor Relationships Patents Trademarks Data Bases Copyrights Trade Secrets Internet Assets Proprietary Systems IA vs. IP: Commercialized Separate from Other Assets
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IP Property Types Bundles of Intangible Assets (IA),
each contains Intellectual Properties (IP) Marketing Relationship (Customer / Supplier) Marks, brands, names, domains Trade-dress, packaging, logos Non-competes, key-person Customer / Supplier relationships Distribution networks Order backlog Technology Contract 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
Cost Income Market Description Economic principal of substitution Measures expense required to replace Neglects future benefit Present value of future economic benefit Requires projections and a risk assessment Requires allocation of benefit specific to the asset Value based on price of similar assets Requires suitable comparable assets Application Replication / replacement feasible Benchmarking DCF Relief from Royalty Comparable transactions Benchmarking Valuation as Art and Science
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Valuation Tools of the Trade
The “Science” of Valuation Discounted Cash Flow Models Comparable Valuation Ratios Replacement Cost Relief from Royalty Allocation / Excess Earnings Option Models Proprietary Approaches
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Changing Valuation Terminology
Level of Value Value Definitions Fair Market Value Fair Value Strategic Value Liquidation Value MVIC = Assets + Liabilities MVE = Equity Ownership Minority Interests Who’s Setting Standards? AICPA, ASA, ISO, NACVA, IRS, Courts, FASB, LESI, and more Defining the Assignment to Avoid “Bad Art”
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Case: Improper Use of a Character
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 applied Income approach calculation yields different value than market and cost approaches
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Case: Improper Use of a Character
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 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 agency State 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 Take-away: Both IP and IA Contribute to Value
Case: Identifying IP We can see IP exists . . . What are the key types of IP Assets? IA at the CLIENT Proprietary systems (some could be commercialized) Proprietary methods Relationships / key people (can’t be commercialized) History / Longevity / 1st to Market (can’t be commercialized) Case Take-away: Both IP and IA Contribute to Value
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Value Constraints Present Value of Expected Future Benefit Intangible Assets Brand / Trade Names Intellectual Properties Value of Business = = = Intangible Assets Tangible Assets Tangible Assets Could 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
Could a company’s IP assets exceed the market value of the business? Frequent Context for IP Valuation: Purchase Price Allocation (FAS 141/142) Purchase Price Creates Goodwill What Portion of the Acquired Goodwill should be allocated to IP? What are the components of the IP Allocation?
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Can Value of IP > MVIC?
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 flow Tools / Science Forecast cash flows by product Quantify the interaction of IP Assets and their contribution to earnings Case Take-away: Context is key / Context Can Be Forced on the Value Analyst
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What if the Context Changes?
What if we don’t have a completed transaction between a wiling buyer and a willing seller? 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)
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What if the Context Changes?
What if we don’t have a completed transaction between a wiling buyer and a willing seller? IP Valuation Methodologies Comparable Transactions Relief from Royalty Discount Future Benefit Replacement Cost 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
No More Rules of Thumb Replacing Rules of Thumb 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 thumb If it’s a universal norm, it can’t meet the criteria for comparables Licensing agreement = contractual financial agreement Commitments can and do take many forms Hypothetical agreements must reflect their real- world counterparts This Shouldn’t be Shocking
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Reflecting Real-world Complexity?
A Typical Relief From Royalty Calculation Did Consider . . . Forecast benefit (sales, term) Industry dynamics (rate) Risk assessment Assumed . . . Constant sales Industry average royalty rate No changes during term
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Case: Alternative Royalty Rate Analyses
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
Royalty Rate Build-up Method: BVEq BVEQ= CBV + (IVE1 + IVE2 + …. + IVEN) Surveys and Comparable Transactions are not The Only Tools Available
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Case: Reflecting Reality
Take-away: “Hypothetical Negotiation” Drives Greater Analytical Burden
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When Valuation Issues Arise?
Question Answers Why is valuation needed? Transaction, Infringement, Financial Reporting, Tax/Transfer, etc. What level of value? MVIC, MVE, Minority Interest Who will use the value result? Accountants, IRS, Potential partners or investors, Management, other What 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 Context + Time = Value
Reconcile results from multiple approaches Reconcile the calculations to the context Context + Time = Value There Are No Valuation Answers: Only Good Choices
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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 www.consor.com 858 454 9091 IP Valuation
IP Litigation Support 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 Assisting attorneys with damage calculation parameters & case strategy Proven success as expert witnesses Economic damages in litigation Federal, state & international experience Arbitration, and mediation Licensing Consulting IP Transactions 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 Maximize the value of bankrupt assets Identify valuable IP in bankruptcy Market and sale of bankrupt IP assets Value and dispose of intellectual property
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