Transcript http://xellectip.com December 17, 2010 ™ Copyright 2008 WORLD INTELLECTUAL PROPERTY ORGANIZATION WIPO TRAINING OF TRAINERS PROGRAM ON EFFECTIVE INTELLECTUAL PROPERTY ASSET MANAGEMENT BY SMALL AND MEDIUM-SIZED ENTERPRISES.

http://xellectip.com
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WORLD INTELLECTUAL PROPERTY ORGANIZATION
WIPO TRAINING OF TRAINERS PROGRAM
ON EFFECTIVE INTELLECTUAL PROPERTY
ASSET MANAGEMENT BY SMALL AND
MEDIUM-SIZED ENTERPRISES IN DUBAI
Dubai, December 19 to 23, 2010
IP and Finance:
Accounting and Valuation of IP Assets;
IP-based Financing
Rachna Singh Puri
Xellect IP Solutions, India
www.xellectip.com
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Assets
Wealth of a business includes:
• Working Capital
• Fixed Assets
• Intangible Assets
– IP Assets
•
•
•
•
Created by law
Identifiable
Transferable
Have economic life
- Other in-identifiable assets like know-how, work force
etc
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Value Of An IP Asset
Value of the FUTURE economic benefit
- Ability to exclude competitors from a market
- Ability to maintain/gain market share
Value different than Price (monetary amount in trading)
-Value to a buyer usually exceeds the price paid
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Context of Value
• Is the asset in use/ not in use
• Validity and strength of the asset
• Legal, tax, financial or other business
circumstance
Reason for valuation
Valuation method used
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Reasons for Valuation
Transactions involving IP Assets
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buying
selling
licensing
franchising
merger & acquisition, joint ventures
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Selling IP Assets
• Permanently transfer ownership of
the patent to another entity.
• Receive an agreed-upon payment
once, with no future royalties
• Value obtained immediately, without
having to wait any longer to realize
that value progressively
• Avoid any unforeseen risks that will
reduce the value of the IP in the
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Licensing IP Assets
• Obtain the benefit of royalties for the remainder
of the life of the IP
• Slow incremental value for longer time period
• Particularly useful if the company that owns the
IP is not in a position to conduct business:
– at all
– in sufficient quantity to meet a given market need
– in a given geographical area
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Licensing Opportunities
• Exclusive license: a single licensee has
the right to use the IP, which cannot even
be used by the owner
• Sole license: a single licensee and the
owner have the right to use the IP
• Non-exclusive license: several licensees
and the owner have the right to use the IP
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Identifying Potential
Commericalizing Entities
• Conduct Competitive Intelligence
• Find synergistic partners for:
– Research collaboration
– Manufacturing
– Marketing
• Points to consider:
– Technology
– Market
– Customer needs
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Considerations
• Subject Matter
• Extent of Rights
• Exclusivity
• Financials
– Or Lack Thereof
– Most Favored Licensee
– Lump Sums
– Royalties
• Territory
• Sub-license
• Improvements by
• Financial
Administration
– Licensee
– Licensor
• Technical Assistance
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Reasons for Valuation
Financing based on IP Assets
Attracting investment
Procuring loans
Borrowing against the license stream
Securitization of IP assets
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Reasons for Valuation
•
•
•
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Litigation
Financial Reporting
Taxation
Bankruptcy
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Characteristics of IP
Assets
• Trademarks
– leverage the brand equity through brand extensions,
franchise set-ups
• Patents
– exclusivity for markets, technologies
• Designs
– strong customer connect like in trademarks
• Copyrights
– derivatives for downstream revenues from
merchandizing, adaptations
Valuation method would differ for each and for combinations
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Time Periods for Different Forms
of IP
1 5 years
Industrial
Designs
50years
Forever
Copyrights
Trademarks
Valuation method would account for different time-periods for
different assets
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Standard for Valuation
• Fair Market Value
– Based on willingness to exchange between
the buyer and seller, common valuation
method for most IP assets
• Fair Price Value
– Post transaction purchase price allocation
(value in-use), mostly used in litigation
Who is the assumed buyer of the asset?
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Traditional Valuation
Methods
• Transaction/Market Method
– Actual price/royalty paid for a similar asset under similar
circumstances
• Income method
– Expected income stream that the asset holder would get during
the lifetime of the asset
• Replacement Cost method
– Establishes the value of the asset by calculating the cost of
developing a similar asset either internally or externally
• Life Cycle based methods
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New Valuation Methods
• Option-based methods
– Based on the option pricing methods initially
developed for use in pricing stock options
• Other Methods using probabilistic
estimates
- Compute probability of favorable event
- Compute payoff if the favorable event occurs
• Real Option method
• Monte Carlo simulations
• Binomial Expansion method
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Limitations of Valuation
methods
• Depends on the context
• Transaction method - right selection of baseline
may not be available
• Income Method - Predictive, as good as
assumptions
• Replacement Cost Method - Not accurate
representation of value, development cost may
be small, but market impact may be huge
• New Methods - Dependence on probabilities
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Example 1
Transaction Method: Trademark
Context: Royalty rate for trademark for a UAE health
supplement company and its several overseas
affiliates for Tax purpose (Test Contract)
 Identify a baseline transaction and make adjustments
- royalty at 8% of net sales (Base Contract)
Attribute
Base Contract
Test Contract
Adjustment
Method
Adjustment
Location
Latin America
Asia
Subjective estimate
+ 0.2%
Advertisement Support
None
Upto USD 2M
in year 1
Reimburse
+0.2%
IP strength
Strong
Moderate
IP Firm Analysis
-0.5%
Term of contract
5 years
renewable
3 years renewable
None
0
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25% royalty
rate (net
profit) is
also often
used
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Example 2
Income Method : Trademark
Context: Trademark of a retail gasoline brand for tax
planning
 Identify price for similar grade unbranded gasoline
 Price premium for trademark brand = USD 50
- Downward adjustments for costs for advertising, promotions, etc (APP)
(0.2%)
 Estimate Annual expected sales (AS) =USD 3,000,000
 Time : Infinite life
 Discount Rate of 20% based on typical rates of return
Trademark /Brand Premium=USD 29,880,000
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Example 3
Replacement Cost Method: Patents
Context: A company spends USD 250,000 per year
to develop and patent a technology
 Period for development: 2 years
 Time cost of money :10% per annum
 Risk for success (Chances for failure in market): 40%
Replacement cost = (Total Funds invested + Time
Cost for money )* Success Factor
[500,000 + {250,000*.1 + 500,000*.1) ]*1.67
Replacement Cost = USD 960,250
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Example 4a
Life Cycle Based valuation of Assets: Patents
Context: Licensing, term: life of longest running patent (14.5
years), min. gross royalty : USD 100,000 per annum,
payment net of tax, VAT : 16%, withholding tax 10%
Net royalty revenue = 88,400 USD pa
Life
Discount NPV
Rate
14. 5
14%
542967
7
7%
476300
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Conservative
Approach
Year
1st year
2nd year
3rd year
14th year
88400
76023
65380
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Example 4b
Life Cycle Based valuation of Assets: Patents
Added Context for Example 4 case: Sales and
Profit estimates for the assets
2nd
3rd
Sales USD 4.5
Million
6
10
5% royalty .225
.300
.500
75% net
profit
.90
1.50
Years
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NPV of future
net profit =
11.3 Million
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Example 5
Binomial Method: Use of decision tree method
Context: non commercialized patent for
a new diagnostic test device for negotiated sale
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Event
Probability
Successful prototype development
75%
Hospitals agree to field test the
diagnostic test device
50%
Patent Effective
75%
Design around or a new technology
50%
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Example 5 Contd.
75%
Annual
Value
5000
USD
Prototype is not
50%
successful
25%
Hospitals
20,000USD
50%
75%
Patent ineffective
40,000USD
50%
25%
Design
160,000USD
50%
320,000 USD
After estimating the “expected” licensing fee, calculate the net present
value using income method or any alternate method
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References & Resources
Acknowledgement: This presentation includes
concepts and materials from several resources
including:
– IP Panorama
– Valuing and Pricing of Technology based Intellectual
Property, Richard Razgaitis, 2003
– Intangible Asset & Intellectual Property Valuation: A
multidisciplinary Perspective, Paul Flignor & David
Orozco, 2006
– WIPO/INN/DDK/00/5(a), Paper by Dr John Turner,
Flinders Technologies Pty Ltd, 2000
– Other WIPO resources on IP Valuation
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Make your IP Assets work for
you!!!
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