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CN IP Valuation
PINTAS IP Valuation traces your revenue back to your IP assets in order to account fairly and accurately the value of your IP assets
Why Conduct an Intellectual Property Valuation ?
In order to be able to sell, license, franschise or enter into any commercial arrangements based on IP assets, you need to be able to put a value on an IP asset. IP valuation is also beneficial in the enforcement of IP rights, for internal management of IP assets, and for various financial processes.
Thus, the three critical attributes of an intangible asset are: i) identifiability ii) control (power to obtain benefits from the asset) and iii) future economic benefits (such as revenues or reduced future costs).
IP assets are intangible in nature. Many IP assets are not reflected in the companies’ balance sheet. Pintas IP Valuation traces your revenue back to your IP assets in order to account fairly and accurately the value of your IP assets. We help you to determine whether, and when, conducting an IP valuation might be commercially beneficial for your business.
Therefore, in summary, the purpose of the IP valuation can be depicted as per the diagram below:
Reasons to Conduct IP Valuation
Reasons to Conduct IP Valuation
Reasons to Conduct IP Valuation
Reasons to Conduct IP Valuation
Reasons to Conduct IP Valuation
Reasons to Conduct IP Valuation
Reasons to Conduct IP Valuation
Prerequisites
To be able to value an IP asset, the asset should meet the following conditions:
- It must be separately identifiable (subject to specific identification and with a recognizable description)
- There should be tangible evidence of the existence of the asset (e.g. a contract, a license, a registration document, record in financial statements, etc.)
- It should have been created at an identifiable point in time.
- It should be capable of being legally enforced and transferred.
- Its income stream should be separately identifiable and isolated from those of other business assets.
- It should be able to be sold independently of other business assets.
- It should be subject to destruction or termination at an identifiable point in time.
Intellectual Property Valuation in Practice
Pintas, together with Alliance of IP Owners (AIPO), facilitates the introduction of IP entrepreneurs to potential investors through presentations and other mechanisms. AIPOANGELS focused on potential investments in the IP based enterprises. Potential members must have prior experience in the IP fields or a strong desire, willingness, and capability to learn substantive components of the IP industry.
Securing Financing
Pintas, together with Alliance of IP Owners (AIPO), facilitates the introduction of IP entrepreneurs to potential investors through presentations and other mechanisms. AIPOANGELS focused on potential investments in the IP based enterprises. Potential members must have prior experience in the IP fields or a strong desire, willingness, and capability to learn substantive components of the IP industry.
Attracting Partners / Investors
Before investing in a company, venture capitalists/investors need to know the value of that company’s IP. Proper valuation of IP assets can therefore help win over such potential investors, who tend to look for maximal return and minimal risk. In addition, if you’re considering a joint venture, strategic alliance, merger or acquisition, IP valuation can assist in understanding how much value the IP assets of all parties contribute to the partnership.
Settling Disputes
Knowing the value of an IP asset can influence your decision about what strategy to employ if that asset is infringed upon. Through IP valuation you will be better able to decide whether to pursue the court route, to opt for alternative dispute resolution, or even whether to consider licensing the asset to the infringing party. IP valuation also plays an important role in calculating damages.
Licensing and Franchising
Having a thorough understanding of your IP assets before you enter into negotiations on licensing will help ensure that you are able to make more informed decisions on the terms and conditions of the licensing agreement. Knowing your IP assets will also assist you in determining fair royalty rates. In franchising too, both franchisor and franchisee need a thorough understanding of the value of IP assets.
Valuation Method
The principal methods for valuing IP assets are:
No | Valuation Methodology | Description |
|---|---|---|
(i) | Income approach | The income approach entails estimating an IP’s indicative fair value based on the present value of its future free cash flows. The commonly used method of valuation under the income approach is the discounted cash flows (“DCF”) method.
Under the DCF method, the IP’s indicative fair value is established by discounting all its estimated future free cash flows to equity (“FCFE”) at its estimated cost of equity (“COE”). FCFE are a series of cash flows that the IP expects to achieve in the future and are distributable to its shareholders. As FCFE are not actual cash flows, judgments are used to estimate the amount of FCFE that the IP is expected to generate in the future. Hence, the DCF analysis is highly dependent on the key bases and assumptions used in arriving at such projections. FCFEs are typically projected for a period of 5 years. The projection period, however may be longer or shorter depending on the IP’s sector, stage of development and predictability of its financial performance. Given the inherent difficulties on accurately projecting the IP’s financial performance over an extended period of time, a terminal value is commonly used to capture the subject matter’s remaining value that is beyond the projection period i.e. its “going concern value”. |
(ii) | Comparable approach | The comparable approach entails determining the IP’s indicative fair value with reference to the prevailing valuation multiple of other IP which carries similar business and valuation characteristics. The commonly used valuation multiples include the price-to-earnings multiple and/or the enterprise value to earnings before interest, tax, depreciation and amortization multiple. |
(iii) | Replacement cost approach | The replacement cost approach entails determining the IP’s indicative fair value based on the estimated amount of money that would need to be incurred in current cost terms in order to develop an IP with similar characteristics as the subject matter. |
(iv) | Relief from royalty method | The relief from royalty method is based on the deprival value theory where it looks at the amount of income that an entity would be “deprived” of, if it did not own the IP but was required to rent it from a third party. The royalty represents the rental charge, which would be paid to the licensor if this hypothetical arrangement were in place. |
(v) | Real option method | The real option method entails determining the IP’s indicative fair value based on its discounted future cash flows and the projected risk of success in each major stage of the IP’s life cycle. This method of valuation is highly technical and relies significantly on various subject estimate of the analyst such as the IP’s probability of success. |
The income approach entails estimating an IP’s indicative fair value based on the present value of its future free cash flows. The commonly used method of valuation under the income approach is the discounted cash flows (“DCF”) method.
Under the DCF method, the IP’s indicative fair value is established by discounting all its estimated future free cash flows to equity (“FCFE”) at its estimated cost of equity (“COE”).
FCFE are a series of cash flows that the IP expects to achieve in the future and are distributable to its shareholders. As FCFE are not actual cash flows, judgments are used to estimate the amount of FCFE that the IP is expected to generate in the future. Hence, the DCF analysis is highly dependent on the key bases and assumptions used in arriving at such projections.
FCFEs are typically projected for a period of 5 years. The projection period, however may be longer or shorter depending on the IP’s sector, stage of development and predictability of its financial performance. Given the inherent difficulties on accurately projecting the IP’s financial performance over an extended period of time, a terminal value is commonly used to capture the subject matter’s remaining value that is beyond the projection period i.e. its “going concern value”.
The comparable approach entails determining the IP’s indicative fair value with reference to the prevailing valuation multiple of other IP which carries similar business and valuation characteristics. The commonly used valuation multiples include the price-to-earnings multiple and/or the enterprise value to earnings before interest, tax, depreciation and amortization multiple.
The replacement cost approach entails determining the IP’s indicative fair value based on the estimated amount of money that would need to be incurred in current cost terms in order to develop an IP with similar characteristics as the subject matter.
The relief from royalty method is based on the deprival value theory where it looks at the amount of income that an entity would be “deprived” of, if it did not own the IP but was required to rent it from a third party. The royalty represents the rental charge, which would be paid to the licensor if this hypothetical arrangement were in place.
The real option method entails determining the IP’s indicative fair value based on its discounted future cash flows and the projected risk of success in each major stage of the IP’s life cycle. This method of valuation is highly technical and relies significantly on various subject estimate of the analyst such as the IP’s probability of success.
- IP Search/Analytics
- IP Finance
- IP Structure
- IP Enforcement
- IP Training & Event
- IP Tax
- IP Valuation
- IP Capitalization
PINTAS IP Valuation traces your revenue back to your IP assets in order to account fairly and accurately the value of your IP assets
Generally, IP assets are difficult to value because of the following reasons:
- Historically, no public trading markets (eg property)
- Terms & Conditions vary widely.
- IP assets are inherently dissimilar
- IP transfers are often motivated by unique strategic considerations
- Details of IPR transfers are usually not widely disseminated
IP Valuation is not so much a matter of science but rather a matter of external judgement. The Foundation of IP valuation analysis consists of four constituent blocks, each with an associated question:
- Purpose – Why are we valuing the asset?
- Description – What is the asset?
- Application – How will the asset be used?
- Standard – Who is the assumed buyer of the asset?
There are many IP valuation methods in the markets as summarised in Diagram 2.7 below:-
In a nutshell, the most common valuation methods are based on one of the three methods below:-
A. Cost – Based on cost to replicate, (less functional or economic obsolescence) that is the cost to create or recreate the asset; we look at what we spent on developing the IP and what another company might spend if they were to invent it from scratch.
B. Market – Based on market transactions involving comparable assets (with adjustment for differences) that is the sales of comparable IP, where a “somewhat” similar deal could be used for the purposes of comparison.
C. Income – Discounted Net Cash Flow (royalties/profits/savings)
which is based on the future economic benefits produced by the intellectual property; where we look at the projected incremental profits or cost savings from using the IP.
For the purpose of discussion, we shall look at the Discounted Net Cash Flow Method. The Discounted Cash Flow Method involves a summation of the net cash flow derivable from an IP assets over its useful life and discount the value to the present day value using an effective discount rate. To do that, we need to
(a) Determine the overall cash flow of a company from P&L account
(b) Disaggregate the business segment and product line ( Diagram 2.7.1)
(c) Disaggregate the earnings of the relevent product line to derive the earning attributable to the intangible assets ( Diagram 2.7.2)
(d) Disaggregate the intangible assets earnings to arrive at the earning attributable to a particular IP asset. ( Diagram 2.7.3)
(e) The value of an IP Asset can be deduced using the formula:-
1. Identify incremental cash flows (x) for each period (n)
2. Select appropriate discount rate (r)
3. Calculate net present value
Diagram 2.7.4 gives an example of the application of the formula
Diagram 2.7.1
