Valuations & Intellectual Property.
Valuation as it is related to Intellectual Property. Intellectual property is a term used for a group of intangible assets that are owned and legally protected by a business from outside implementation or use without consent. Intellectual Property provides companies with distinct competitive advantages. Intellectual Property (IP) is an asset that provides the same protective rights as physical property that can boost the valuation of companies. Obtaining protective rights is crucial since it prevents replication by potential competitors. Intellectual property is considered to be a company’s most precious asset. It is often the lifeblood with which a company can develop and launch a product. Developing innovative proprietary products is a key requirement to allow a business to grow. In today’s knowledge-based global industrial economies, effective management of intellectual property assets is most important.
Products backed with Intellectual property are the most potent key drivers for advancing the global economy and career creation. Advanced nations, like the U.S., that usually attain intellectual property rights get more overseas direct investment and are more hightly rewarded with economic growth and jobs in high-end industries. Millions of Americans across the nation are employed in IP-intensive business sectors. These industries drive the majority share of U.S. exports.
Patents, software code, startups, and further intellectual property assets of companies all have their own peculiarities. The value of a patent is often times seen as a weapon of litigation where claim infringement is the thrust of civil action. The potential for patented products to collect licensing royalties and the benefits of patents working against infringers in court adds great value to companies. Many startup investments have been structured as preferred stock transactions between common stock holding founders and investors in cases where startups have had their products backed by intellectual property.
Assets and Their Exploitation.
How an asset will be exploited in the future is an asset’s valuation premise. An asset can be valued under continued use, or alternatively it can be valued for a specific use such as in an acquisition. The most common premise is to position an asset for its best use, which values an asset at the highest value that can be foreseen, regardless of how an asset might be currently used.
Revenue flow into and out of companies can also determine the valuation technique that should be used to value an asset. Valuation techniques also take a look at the practices and behaviors of buyers and sellers in the market. Valuations further take a look at past history and future earning to see if the asset has a history of revenue generation, or to calculate what future earnings an asset can offer. The markets can further be analyzed to see what prices are agreed upon in similar transactions. Revenue or comparable earnings multiples, are not appropriate valuation techniques for startup companies when there is no revenue or earnings to compare. Without a sales revenue history, venture capitalists, angel investors, and other startup investors rely on other valuation techniques to determine startup value.
Valuation, Economics and Legalities.
Valuation is a method of combining the concept of economics with the concept of what is considered legal property. IP valuation is both an art and a science. A valuation analyst uses well-tested and defined financial models and formulas to get a snapshot of quantifiable aspects of the intellectual property. A valuation analyst combines these elements to perform a valuation.
An asset’s functionality is in its ability to generate a return. A discount rate can be applied to that return as well. Commercial valuations are based upon the cardinal rule that: the value of an asset cannot be stated abstractly. The value of an asset is based on factors such as particularly where an asset is located, what time constraints are related to an asset and the circumstances related to the asset. In performing a valuation one should analyze who would benefit from the asset, and what purpose the asset serves.
Valuation and pricing and the valuation methods in licensing and technology transfer is generally viewed as opportunity licensing. This is distinctly different from licensing from a litigation viewpoint. In litigation, a patent’s value has a very narrow focus which is based upon an enforceable time period when claims have been infringed. Conversely, opportunity licensing of early-stage innovation is normally executed before a licensee’s first commercial use. Deal elements include an analysis of patent claims. Deal elements also anticipate the potential use and future earnings of the range of products lines that can be made, used or sold including, variations of products that can be derived, to include their applications, and target markets.
If we consider the value of intellectual property that has been embedded in a new production process, we might find that the value of the IP comprising the new technology is equal to the increase in profits that could be gained. This becomes apparent when comparing the difference in manufacturing costs and or quality using the new technology compared with the old method of manufacturing. The value of the new process depends on both, the profits generated by the final product and on the new production methods that are now available to the manufacturer.
Intellectual Property on the Internet.
By exposing intellectual property on the internet and world wide web, companies run the risk of losing pre-emptive value. This is commonplace in the software industries. When software products become commodities, this is due to the fact that they are easy to imitate, not because they are duplicated and illegally sold. However, customers tend to purchase the original product: over knock-offs. As knock-offs attempt to gain market share, original product makers attempt to maintain market share by lowering prices.
Traditional valuation methods can be selected once we understand the nature of an asset in a particular situation. Supply and demand has an impact on the sale price of intangible goods as well as other items. A seller can maximize the value of a sale by pursuing multiple competing bids. If there is a high demand, an effective promotion can drive a higher asking price. Marketing and promoting corporate assets such as corporate stock and patents can be a legal minefield. This requires a high level of navigation expertise to avoid triggering shareholder, patent or other lawsuits, criminal charges, or federal agency sanctions. The value can be enhanced by the seller, but for some intangible assets, the marketing and
There are a good number of valuation techniques which can be utilized to value IP. There is no one particular method that is appropriate for all situations. Acceptable methods for performing valuations fall into 3 broad areas. They are market-based, cost-based , or based on insights of past and future economic benefits or earnings. One driver that adds value to intellectual property is the emergence of investors that provide funding to companies based on their intellectual property and other intangible assets.
Realistic valuation estimates based upon contrasting a patent with others that have sold in the marketplace, must include the gathering of average prices paid for other patents. This is harder than it looks. Patent litigation, secrecy agreements, and competition, largely keep Information on the pricing of patent acquisitions confidential. IP Transactions usually have a patent purchase agreement that contains confidentiality provisions restricting the disclosure of any details and the price of the transaction. It should be noted that finding information on the prices paid in patent transactions is normally an exception rather than the norm. However, SEC reporting companies and companies in bankruptcy proceedings, have to disclose these transactions to shareholders. Frequently information on these types of transactions is available.
Intellectual Property Capitalists.
Online financial markets for IP allow intellectual property capitalists to combine IP expertise with the world’s finest financial market makers. Using these tools one can extract value from intellectual property. Intellectual property capitalists pursue the full range of strategies to monetize IP. Monetization strategies include licensing, assignment, securitization and collateralization. IP management, know-how, and business methods are widely appreciated for their role in driving economic growth. However, the United States still fails to embrace the real value of intangible assets to provide innovators with the funding they need to capitalize on their ideas.
Patent monetization is not just for struggling companies. Industry leaders like Google, Apple, Oracle, Microsoft and other smaller companies, are all aggressively pursuing to earn returns on their IP assets. Such companies are pursuing icensing deals while still adding and locking up strategic advantage to add to their own products. Microsoft, for example, is already earning greater revenues from licensing its patents to Android phones than from sales of its own Windows Mobile platform.
Revenue from patent licensing has gone through the roof since 1990, increasing from $15 billion to $110 billion today. Companies today realize that IP is a most valuable and flexible asset. Today, the licensing market has just begun. Experts say licensing revenues could top a half-trillion dollars or more annually in ten years.
Physical assets, such as buildings, factories, equipment and plants, constituted 62% of a company’s value in 1982. Today these assets represent less than 30 percent of a company’s market value according to experts at the Brookings Institutie. Today, the bulk of a company’s value now resides in a company’s intellectual assets.
Valuation & Investment Banking.
Investment banks and business brokers engaged to market companies frequently prepare some valuation metrics determining comparable firms that have lately offered, and using a number of techniques. The bankers may create a detailed report examining the financial performance from the business, estimating the worth according to comparables of earnings multiples, revenue multiples, discounted income estimations from the forecasted earnings streams. They choose the most flattering techniques, have a weighted average of all of them and convey an in depth valuation are accountable to justify the greatest valuation possible. With respect to the quantity of bidders thinking about the purchase, the bankers then negotiate cost alongside additional factors within the acquisition deal structure.
Figuring out the financial price of your patents, regrettably, isn’t any easy task. For just one factor, valuation techniques for intangible assets are at the best rudimentary, and the topic of greater than a little debate. For an additional, marketplaces for that buying and selling of patent assets continue to be within their infancy and therefore of little assist in supplying reliable valuation benchmarks.
There are lots of helpful frameworks for examining the company profile of the intangible resource. A key point to think about is the fact that most IP is used along with other IP (e.g., technology is frequently bundled with trademarks and/or trade secrets), along with a consideration from the inter-associations of all IP within the value chain and market existence cycle is frequently important.
Should you create a brand new startup, open up a financial institution account, deposited $5 million in to a bank and immediately run a valuation of the organization (before incurring any financial obligations, obligations or doing anything whatsoever), it might be reasonable to evaluate the value for the organization at $5 million. That would be because that this is actually the price of changing or replicating the organization. This could also represent the liquidation value, because the $5 million staying with you is instantly available, a very liquid resource.
Valuations & Licensing.
A patent could be licensed, it may generate royalty streams during a period of some time and these streams of revenue are ideal for valuation using the discounted income (DCF) method. However, patent retailers usually don’t sell the revenue streams using the patents. Patents are often offered susceptible to licenses, and also the licensees frequently spend the money for royalties in a single lump-sum-usually carrying out a threat of lawsuit or perhaps a court judgment.
Core patents are technologies which are or is going to be utilized in current or future items. You will find couple of market-based recommendations for valuation of those patents because the patents aren’t usually the topic of certification efforts. They’re evaluated, rather, depending on how much they lead towards the commercial worth of an item or business. Dow jones Chemical uses the Tech Factor Method, an instrument introduced by Arthur D. Little consultants. The technique quantifies the financial contribution of every patent like a number of the business’s total internet present value. Alternatively, a Rand Corporation study sets the need for a patent as equal to an R&D cash subsidy rate as high as 25% .
It may be reasonable to make use of the expense incurred in developing a company, or the all inclusive costs of funds invested in the industry as the grounds for valuation of the startup or an early-stage company. However, when an organization matures into a recognised business, it might be harder and harder to estimate the expenses connected with producing goodwill. Assessing the expense connected with building all of the intangibles connected by having established clients are highly speculative. It is possible to estimate the expense connected with building the framework of the business, however the magical factors that get into turning the framework into a lucrative venture are extremely intangible to estimate with acceptable amount of precision. The substitute, replication and price-savings methods to valuation are not so appropriate for established companies.
If similar technology assets were lately offered under similar conditions, only then can data points like a grounds for a comparables-driven valuation be used. However, these assets are frequently unique and transaction metrics aren’t always revealed, so locating relevant comparables could be a challenge when appraising products.
Valuations in Mergers & Acquisitions.
Valuations are instrumental in merger or acquisition transactions. The cost compensated to get a company sets a precise valuation for your particular company at that time over time, particularly when the purchase is financed in cash. Once an acquisition is financed and shares from the acquirer is exchanged for stock within the acquired company, other parts of the valuation process are essential to determine the fair market cost from the stock exchanged. The valuation figures created may be a bit more subjective than the usual pure cash transaction.
Having a projection for the future profits to become produced by an organization, companies would then be able to use discounted income analysis to look for the Company’s valuation. Indeed, this process is adopted through the courts (especially Delaware courts) to find out a “fair market value” of the business. This especially occurs in instances where shareholders ask a legal court to stay a dispute and supply an evaluation on the company’s value.
As opposed to online companies, recognised clients are currently producing sales revenues and they have cash flows to determine and drive valuation computations. With company shares traded on public stock markets, a large amount of information is readily available for examining the possibility worth of a recognised business. Fortunes can be created or lost overnight on Wall Street and traders have sophisticated methodologies for predicting the value and trends of companies that also result in determining the value of shares.
By having a trademark outright, a business is saving costs connected with having to pay license charges for any mark. Trademarks are frequently licensed, or “rented”, for connection to items or services.
A typical mistake produced in valuing IP while using the earnings approach is by using the entire worth of the earnings in the business unit utilising the IP as opposed to the incremental earnings due to the IP itself. Falling into this error means the valuer has unsuccessfully taken into account the complimentary assets which have led to generate the earnings. These other assets include tangible assets, staff know-how, marketing assets and the like. Essentially, the valuer has valued the whole business unit, instead of any particular bit of IP within that unit.
A simple approach to figuring out the need for a patent that makes up about the particular contribution from the IP towards the profitability from the method is the discounted income method. This process can be used for valuation of all of earnings creating assets.
Other Valuation Approaches.
Earnings approaches calculate value in line with the future revenue streams, cost approaches mostly calculate at the expense of substitute, and market approaches calculate the worth by evaluations concentrating on the same assets lately traded available on the market.
While using the market approach, the need for the IP is dependent upon the arm’s length cost in comparable transactions. This is dependant on the idea that the licensee or customer won’t be prepared to pay greater than the price others have paid for similar IP.
Another, more sensible, conventional approach to valuing IP is by using comparables. A “comparable” technology is one that’s utilized in exactly the same industry. It performs an identical service or function, and it is just as important towards the final product being offered because the IP is what we are attempting to value. An approximation for the value of IP is the royalty compensated for that comparable technology. This includes modifications of the IP for just about any substantive variation backward and forward.
The discounted income technique is helpful in figuring out the need for IP once it’s been invented. A remaining question of great interest is, would an R&D-based firm determine the need for a brand new technology while it is still developing? The cost savings or demand-fulfilling qualities from the technology haven’t yet been fully determined. Additionally, it might be a long time before any method is introduced to promote the product. Market conditions could change significantly. Understanding the likely worth of a new technology is needed if a firm is to decide whether or not it is useful to carry on an expansion project to develop a new technology..
The earnings approach measures the money flow connected with possession from the IP. The need for the IP may be the internet present worth of the expected future earnings streams the IP will probably generate. The parameters that determine the worth of IP include how big the earnings stream is, the time period of the earnings stream, and also the risk connected with realisation from the earnings.
Further Valuation Techniques.
Ordinary discounted income analysis may be the clearest window on IP valuation available. It’s a method for locating the chance price of not utilizing an invention by calculating the net income effects of defaulting to another best alternative. DCF describes increases from certifying a technology-it doesn’t take into account the gains between the licensor and the licensee. Should there be gains from trade, then bargaining power-not industry guidelines- determines those gains. Bargaining power is the opportunity to hurt those you are negotiating with when walking away from the negotiating table.
The discounted income method evaluates the long run stream of revenue from the relevant incremental costs by using the IP. It compares the long run stream of revenue to the current discounted worth of income by following the best alternative. This yields the utmost royalty that the manufacturer could be willing to cover making use of the patented technology. There are lots of natural issues with the price approach. The most important is it does not reflect the income potential from the IP. The need for IP comes from its earning potential, and never your buck.
The price approach assumes the fair worth of the resource would be the just like your buck, where there’s an immediate relationship between cost and prospective profits. However, cost doesn’t always associate to value. Clearly there’s a possibility of a higher valuation to be placed on less effective assets where high amounts of expenditure happen to be directed and the other way around.
The revenue multiple valuation method might be susceptible to critique for the reason that it compares the top line revenue and does not determine that the organization is lucrative. A lucrative company with low revenues is possibly worth greater than a loss-making company with large revenues.
While using the build-cost valuation method, assets are regarded as worth a maximum of what it really would cost the customer to rebuild the merchandise by employing an in-house development and design team. For example, if a buyer might obtain a higher-technology product design that will take 5 engineers along with a project manager 24 weeks to reverse engineer, the customer may estimate the in-house build cost was, possibly, $2 million dollars.
Three Traditional Valuation Techniques.
The 3 traditional valuation techniques, transaction, earnings, substitute cost, work for pretty much all valuation analyses. However, in the last decade we view the development of the new group of valuation techniques according to future contingent occasions. This group of techniques includes real options, binomial models, and Monte Carlo simulations. Decision tree models are used in where conditional situations are needed for IP to create value where calculations are modeled clearly. Fundamentally, all these techniques can be combined into a two step process: first, we compute the prospect of the good event occurring that can make the IP valuable (or ‘in the money’), and 2nd, we compute the payback when the favorable event happens (usually using among the traditional three techniques described above).
The earnings method of valuation assesses value today according to earnings streams predicted to be produced later on. Also taken into account is the likelihood that earnings streams will materialize based on the forecast. Where a resource or business operation creates a stream of revenues, its value can be established by calculating the entire net gain the resource will generate in the future. Time-value-of cash will be considered to discount the long run revenue streams to determine what individual future incomes may be worth today.
Although sometimes used, cost-basis prices is really a poor foundation of valuation, since it does not think about a technology’s value according to future commercial programs. The marketplace will pay for value to become received, not the price to produce.
Ultimately, intellectual property may be worth what someone might pay for it. As a result, any valuation is just a settlement tool. Comprehending the underlying presumptions and ideas behind the different valuation methodologies will help greatly in discussions for that purchase or for the certification of IP.
Replication of Technology & Valuations.
Where a startup has simple technology, for example software, the price of replicating the technology will frequently be utilized as the foundation of the valuation for the acquirer.
Where potential licensees haven’t been recognized, and where the certification potential is unknown, the possible revenue streams from certification cannot be employed to make up the foundation of the valuation. Nonetheless, we are able to compare the patent to similar patents which have have been offered in the marketplace to be able to estimate an industry cost. As every patent needs to be unique to become granted, there aren’t any two identical patents, so locating a perfectly comparable patent isn’t possible. However, it’s frequently easy to find patents in similar fields concentrating on the same priority dates, which have lately been offered in the marketplace and estimate value utilizing a comparables approach.
When the intellectual property offers significant economic advantage within an active market, using the price method will probably understate its value. If, however, development continues to be inefficient or extended, using the price method might overstate its value. Essentially, the need for the IP may be the cost to exchange or recreate that IP. This process compares the historic cost incurred to build up and create the intellectual property.
Early Stage Company Valuations.
Within the seed and initial phases of startup development, sales and earnings projections might be so speculative that they’re not given serious attention. Reflecting on their highly speculative nature, and also the risks involved, the special discounts generally put on online companies by investment capital traders is 25-75% each year. The obtaining corporation frequently likes to utilize a cost-based calculation to determine value during these situations. Since this does not include future potential earnings calculations this does not provide the most accurate approach, the cost-based calculation used by such companies only considers the price of replicating the technology. Such companies employ this as a grounds for valuation.
The best approach to doing a valuation might be to engage in an analysis where a number of different valuation techniques, calculations, and methods are utilized where the best most pertinent calculations of interest are analyzed and averaged to provide a better valuation estimate or value range.
As part of Uriel Corporation’s Turnkey Think Tank Consulting Services, Uriel works to assist clients to navigate the complex waters of analyzing a client’s IP and patent portfolios to develop valuations related to their intellectual property. Valuation consulting efforts can be geared to help clients determine what their intellectual property and company is worth. Such efforts are a key element to position clients better for the development of strategic alliances, and to enhance negotiations related to mergers and acquisitions, or to sell company stock, or to sell a company.
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