Month: October 2022

Standard of value

The most commonly used standards of value are Fair market value and Fair Price Value. It is important when undertaking an IP valuation exercise. Fair market value (Market value) can be defined as the price at which an asset or service passes from a willing seller to a willing buyer. It is assumed that both buyer and seller are rational and have a reasonable knowledge of relevant facts. Fair value (Fair price) is seen as appropriate for use in post transaction purchase price allocation. It is based on the assumptions that market participants would use when pricing the asset. Whereas fair market value is seems to be more appropriate when used in the premise of value in exchange, fair value is often based on premise of value in-use. As mentioned earlier. in common situation, IP valuation is a process to evaluate the fair market value of an IP asset.

Purpose of valuation

In order to determine the premise for calculation of value, it is necessary to understand the purpose for valuation. For instance, valuation from the perspective of market value and investment would be completely different. In commercial situations, market value is the appropriate premise. International Value Standards define market value as “The estimated amount which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s‐length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.”

Valuation methods

The methodology applied and assumptions made while applying particular valuation method affects the value of IP assets. Market Method is the ost effective form of valuation. Cost method is usually refrained by companies since it ignores the novel characteristic of IP. This method is helpful for R&D costs.

Nature and strength of IP asset

The competitive strength of an IP asset determines the comparative valuation that it shall hold in the market. The factors such as customer responsiveness and market distribution of a product or availing service determine its IP value. The threat of new entry and substitutes affect the value of IP assets.

Licensing and Franchising

A thorough understanding of the IP Assets ensures an informed negotiation and decision making regarding the terms and conditions at the time of licensing-in or licensing-out of IP especially in determining fair and robust royalty rates. In the case of franchising too, both the franchisor and the franchisee require a thorough understanding of the value of the trademark(s) and trade secrets and know- how of other IP assets. Examples; Mc Donald’s , Pizza Hut, Dominos, Haldiram, Bikanerwala.

Merger & Acquisition, Joint Venture or Strategic Alliance

The primary reason for considering an M & A transaction is the value of the IP assets of the target company. IP valuation enables the parties to take an informed decision on the acceptable cost of capital or deciding on financial leverage strategy to be followed. It also influences positively the resulting company’s value and share price. The strategy of world class companies such as Volkswagen group and Tata group enunciates the IP valuation technique to adopt brands. The Volkswagen Group owns Audi, Bentley, Skoda, Lamborghini, Buggati , Porsche and many other well-known brands. Tata group owns Jaguar and Land Rover.

Investment in Research and Development (R&D)

IP valuation helps in budgeting and resource allocation decisions. For example, if a company is spending a significant amount of money on internal R&D but is losing ground to competitors due to slow or late product introductions, it may need to rethink its R&D strategy and processes. IP valuation also provides strategic guidance for new product development, brand-extensions, line-extensions, managing foreign filing and prosecution costs, etc.

Financial Reporting

The recognition of the increasing share of IP assets in the total market value of enterprises has contributed to the change in the way the accounting community has begun to treat IP assets in financial reporting. The international accounting standards board (IASB) now recognizes acquired and identifiable intangible assets (i.e., IP assets) and requires all acquired IP assets to be recognised as assets, separately from goodwill, on the balance sheet of the business acquiring the IP assets. For instance, when a brand is acquired, IP valuation is done for the initial valuation as well as the periodical impairment tests for the derived values to be included in the balance sheet.

Optimizing Taxation

In devising ways to optimize the tax to be paid by a company, its assets, including its IP assets, require to be valued. IP assets create numerous opportunities for tax planning in both third party transactions as well as internal strategies such as cross-border transfer pricing and centralizing the ownership of IP assets in IP holding companies. The internal revenue service or other tax authorities would like to know as much as possible about the basis for any value determination used when allocating portions of the purchase price associated with the acquisition of a company. Valuation of IP assets helps in assessing fair transfer prices for the use of IP assets, including brands, to subsidiary companies.

Insurance of IP assets

A completely new market is opening up for the insurance of IP assets with a number of major insurers in the developed countries creating products tied to the capital value of IP assets, especially trademarks/brands. Valuation is of extreme importance as far as Insurance is concerned.

Determination the value of your Intellectual Property

Evaluation of IP can be a challenging process. The most suitable method for IP assets depends upon the premise of purpose to be derived from the result, assets subjected to valuation and the specific section for which the valuation is prepared.

The two effective ways of valuation are:

Market based

This is the most commonly used approach, this approach is based on the comparison with the actual price paid for a similar IP asset under comparable circumstances. The calculation would be accurate if there exists appropriate information on the nature and extent of rights transferred, circumstances of transaction for eg; license agreed in litigation settlement. The process initiates with research of an appropriate market to obtain the transaction information about sales, licensing of subject IP. The second step is to select relevant units of comparison such as “per drawing”, “per location”. “per customer” and develop a comparative analysis for the units considering factors such as profitability, risk, Industry, company structure, strength of IP rights, etc.

Income Method

It values the IP on the basis of amount of financial income that IP is expected to generate. In order to evaluate, project the revenue flow over remaining useful life of asset and offset those revenues by the cost related to asset. The risk has to be discounted from the amount of income by using discount rate or capitalization rate. The method is most suitable for capturing value of IP that generates stable cash flows. However, the method does not consider independent risks associated with an IP asset and lumps all the risks together to be adjusted in discount rate.

Patent monetization is an important part of managing an IP portfolio. But before pursuing a particular patent monetization strategy, it is important to have a general sense of the value of the portfolio. In all, the complexities and nuance of patent valuation is a complicated undertaking, requiring a great deal of experience, expertise, and judgment. As such, the many approaches that a patent valuation expert might employ, and the information he or she might rely upon, are beyond the scope of an introductory article. However, this article will enable skilled IP attorneys to develop a solid sense of the valuation process, and to make informed decisions as to how and when to engage an expert.

Potential for Producing Revenue and Profitability

Some patents possess value because they are directly responsible for added revenue. The patented technology might be so important to the product that it drives additional purchases or commands a premium price. Similarly, the subject of the patent might drive sales of related, but unpatented, products. Examples include derivative sales (replacement parts, supplies, and maintenance services) and convoyed sales (sales often made in conjunction with the patented product).

Other patented technologies do not directly contribute to revenue, but might nonetheless be valuable to the patent owner. For example, the patented technology might make it less expensive to manufacture a product, directly reducing the cost of doing business and improving the owner’s bottom line. Others represent an add-on technology that doesn’t directly increase revenue but allows the patent owner to keep up with the feature offerings provided by competitors.

Patents may also be valuable to the patent owner in circumstances where there is not a clear connection to profitability. Patents can, in some circumstances, also be used to great effect for strictly defensive purposes. For example, the patent owner might rely on the patent to stake out a technological realm within which the owner could potentially sue for infringement, but which may also ward off competitors contemplating a lawsuit by raising the prospect that the owner would institute a countersuit.

Years of patent life remaining. Most investors would not want a patent that has limited years of patent protection (e.g. one that is more than 16 years old). However, a patent that was too recently issued (e.g. within the past three years) is unlikely to have been litigated. The average age of patents when they are litigated is three years old. It is better to acquire a patent after it has been proven valid during litigation or has passed through the period when challenge to its validity is most likely. As a sweeping generality, those patents that are most valuable are between 10 and 13 years old.

Number of inventors listed on a patent. A higher number of inventors listed on a patent indicates that the patent is of higher quality than a patent that has a lower number of patent inventors listed. The reason is that more intelligent scientists or engineers believed in and dedicated their time to championing–the technology behind the patent. However, having numerous inventors listed on a patent can be a source of vulnerability: if these inventors are deposed or cross-examined when their patent’s validity is challenged, it becomes more likely that one of the inventors will mention the existence of prior art. Also, failing to list an inventor on a patent risks giving rise to litigation.

Anticipated licensing revenue. A standard procedure in patent valuation is determining the net present value of royalties that will be received as a result of licensing the patent. One benefit of developing a highly delineated model of projected royalties is that very specific factors can be taken into account.

Ability to trigger sales of end products. Patents are most valuable when they cause consumers to buy more of the product or newer versions of the product. For instance, some ten years ago Intel and Microsoft were able to spark sales of personal computers when they introduced new semiconductors and software. Consumers willingly retired perfectly good PCs as they raced to embrace PCs with the greatest processing power and snazziest software. Similarly, patents that increase the utility for existing or new users are generally very valuable. Examples of this can be found in the patents behind the features on cell phones. Finally, patents are valued dearly when the patented feature is a primary factor in the demand for the product. This is to say that the patent is the product. Examples of this contention include the primary patents underpinning many pharmaceuticals, Velcro and Post-It notes.

Ability to generate add-on sales. A licensee may derive important ancillary benefits associated with selling products with embedded cutting-edge technologies. The benefits may be in the form of greater traffic generation to its web-site, catalogs, or stores. A more direct example of generating add-on sales would be a patent that improves on the functionality of ice skates could also contribute to higher sales of protective gear. In such instances, the licensor should seek higher licensing fees from the licensee since the licensee will enjoy spill-over benefits associated with selling the cutting-edge technologies.

Ability to generate sales in new markets. Licensors typically seek lower royalty rates from licensees who will sell the related products in a new market compared to the royalty rates they seek from competitors who will challenge the licensors in their existing markets. While the royalties per unit from the former licensee will be lower, there are two factors that are accretive to patent value in this scenario. First, the total royalties generated by a licensee pioneering a new market are likely to be substantial. Secondly, licensees penetrating new markets do not pose the profit denigration issues for licensors that competing licensees represent.

Stage of development. Typically, the earlier in the commercialization stage a technology is, the lower the licensing value. This is because there are significant risks in the technology never being brought to the market and if the technology eventually becomes market-ready, this will only be achieved at great expense. In the scenarios in which the licensee would have to make much of this investment, the licensing fees would be less lucrative for the patentee.

Quality of law firm. Services such a PatentCafe rate and rank law firms on their history of writing patents that successfully sustain invalidity challenge. Patents drafted by law firms that score highly on such rosters are generally of higher quality than patents that score poorly on such surveys.

Quality of patent examiner. Patents that are granted by patent examiners with longer tenures and more impressive records of granting patents that successfully sustain invalidity challenge are statistically more valuable than patents without such lineage.

Size of portfolio being sold. Our research indicates that each patent family will receive the highest price when between 25 and 76 patent families are included in a patent portfolio. Portfolios with more than 76 patent families are discounted because the buyers believe that the sellers are purging a lot of their mediocre patents in the portfolio sale. On the other side of the spectrum, selling too few patents yields a discounted value per patent because of the natural aversion that patent managers have to seek significant funds (e.g. $3 million) from their Boards of Directors in order to buy a small number of patents (e.g. two).