1. AN OVERVIEW OF IP ASSET VALUATION
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

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. Accounting Challenges
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

22. Accounting Challenges contd.
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

23. Thank you for your kind attention
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.