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Valuation of Intellectual Property Assets

This orientation program provides management students with an overview of intellectual property valuation. It covers the process of valuation, factors influencing value, methods of valuation, and triggers for IP valuation. The program aims to enhance students' understanding of the value and importance of intellectual property assets.

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Valuation of Intellectual Property Assets

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  1. ORIENTATION PROGRAM ON INTELLECTUAL PROPERTY FOR MANAGEMENT STUDENTS FROM IIPM (INDIA)May 3, 2007, Geneva Valuation of Intellectual Property Assets Christopher M. Kalanje, Consultant, Creative Industries Division, WIPO

  2. 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

  3. 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

  4. 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

  5. Value Basis of IP Assets • Traditionally IP assets were treated as Goodwill • Goodwill=the 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

  6. 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

  7. 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

  8. 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

  9. 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 R&D satisfactory? • Are patents worth renewing? • Are brands worth defending? etc.

  10. 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

  11. 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

  12. 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

  13. 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/SudarsanamIntellCap.pdf

  14. 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

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

  16. 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

  17. 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 arm’s length, in active market • second variant uses standard industrial royalty rates

  18. 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.

  19. 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 = A[1/(1 + r)n] where: NPV= net present value (i.e. DCF); A= amount expected at year n; r = risk factor

  20. Methods of IP assets Valuation contd. • Other IP valuation methods include • Monte Carlo simulation analysis • Option pricing theory

  21. 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 firm’s IP due to inherent definitions and assumptions in accounting Accounting Challenges

  22. Rational Factual, precise, objective, comparable information Determines perception of a firm’s management and other market participants Impact on Type of Language developed for IP Internally and externally generated IP is treated differently Goodwill Accounting Challenges contd.

  23. Finally Thank you for your kind attention

  24. 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

  25. 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

  26. Methods of IP assets Valuation contd.

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