IP Asset Valuation and IP Audit
T C James
Director
National Intellectual Property Organisation
Objective
• To give a general introduction to the concepts
of IP valuation and IP Audit
• To briefly explain IP valuation and the key
definitions like assets, IP assets, value and IP
valuation, the differences between various
methods deployed to value IP assets, IP audit,
the preparations, procedures and results of an
IP audit.
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IP VALUATION
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Assets
• An economic resource.
• Anything tangible or intangible that is capable of
being owned or controlled to produce value and
that is held to have positive economic value is
considered an asset.
• An item of economic value owned by an
enterprise that could be converted into cash
• “An asset is a resource controlled by the
enterprise as a result of past events and from
which future economic benefits are expected to
flow to the enterprise”
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Two Kinds of Assets
• Tangible
– Building
– Machinery
• Intangible
– Goodwill
– Intellectual Property
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IP Assets
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Intangible asset – knowledge based
Legal Right to exclude others from using
Limited duration
Assignable/ Licensable/Transferable
– Can be bought, sold, licensed, or given away free
• Multi-usable
• Use does not exhaust
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Factors driving the intellectual
property
• Intellectual property derives its value from a
wide range of significant parameters such as
– Market share
– Barriers to entry
– Legal Protection
– IP’s profitability
– Industrial and economic factors
– Growth projections
– New Technologies
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Risks in IP Assets
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New Patents
Revocation of Patents
Infringement Suits
Trade Secrets
Weak Enforcement Regimes
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Valuation
• Valuation is a process of determining value
or worth of an asset
• Valuation often combines objective and
subjective considerations
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IP Valuation
• IP valuation dependent on various factors
– Use of the IP assets
– Market share of company
– Openness of economy
– Legal protection of IP
• Enforcement cost
– Economic growth
– Profile of economy
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Use of IP Valuation
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For commercial transactions
For pricing product
For evaluating potential merger or acquisition candidates
For identifying and prioritizing assets that drive value
For strengthening positions in technology transfer negotiations
For making informed financial decisions on IP maintenance,
commercialization and donation
For evaluating the commercial prospects for early stage Research &
Development (R&D)
For evaluating R&D efforts and prioritizing research projects
For Financing securitisation
For litigation
For tax planning
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Benefits of IP Valuation
• Can give a better idea of the overall value of the
business
• Can provide a tool to measure and manage the
assets
• Can provide security and backing for lenders
• Can provide taxation benefits (taxation
deductions)
• Can reduce the proportion of business’ net worth
attributed to goodwill – important when selling a
business
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IP Valuation Methodologies
• Transactional/Market Approach
• Cost Approach
• Income Approach
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Transactional Method
• Sales comparison approach
• It is based on actual price paid for a similar or
comparable IP under similar/comparable
circumstances
• Need complete data
• Problem in getting full details
• Two steps: screening and adjustments
• Screening is identifying third party transactions
• Adjustments are in Location, Advertising support,
IP strength and period of licence
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Market Approach
• When
– Focus is on market transactions – sales/licenses
– IP transaction details highly confidential
– Assets typically not comparable
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Different underlying IP assets
Different compensation structures
Different geographic territories
Different market potentials/degree of success
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Income Method
• Intrinsic value
• Ability to generate cash flow
– Income Approach: Based on the incomeproducing capability of underlying IP asset
• Seeks to establish the net present value (hence
use of discounted cash flow [DCF])
• Decision tree analysis (DTA)-based on an
underlying DCF analysis and moves further to take
into consideration flexibility available.
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Income Approach
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PV = I1(1+r)-1 + I2(1+r)-2 + I3(1+r)-3….+ In(1+r)-n
Where PV = Present value of IP asset
I = Economic income projection
r = Discount rate
n = Year
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Variables in Income Approach
• An income stream either from product sales
or licensure of the patent
• An estimate of the duration of the patent’s
useful life
• An understanding of patent specific risk
factors and incorporating those into the
valuation
• A discount rate
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Discounted Cash Flow (DCF) Method
• Attempts to determine the value of the IP by computing
the present value of cash flows, attributable to that piece
of IP, over the useful life of the asset.
• Does not capture the unique independent risks associated
with patents. All risks are lumped together and are
assumed to be appropriately adjusted for in the discount
rate and the probability of success, rather than being
broken out and dealt with individually (i.e., such as legal
risk, technological risk, piracy, etc.)
• Further, often DCF fails to consider dependencies on
properties held by others. In roughly 40 percent of cases,
patents depend on other patents or property held in the
public domain
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Cost Method
• Estimates the value of underlying IP asset
basing on historical cost incurred in
developing the asset
• Two approaches
• Replacement cost
• Reproduction cost
• Replacement Cost: The cost to develop similar
functionality to the subject IP outside the scope
of the legal protection
• Reproduction cost: Cost of reproducing the IP
product or service or procedure
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Cost Approach: When?
• Has limited value
• Used for
– Patents
– Software
– Designs
• When
– Asset is newly created with limited protection
– Commercially untested
– Where reproduction cost best estimate of value
• Buyer unwilling to pay more than cost to recreate or
engineer around protected design
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Cost Approach: Factors?
• Components of Cost Value Assessment
– Materials
– Labour
– Overhead
– Developer’s/entrepreneur’s profit
– Taxes
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Calculating Net Value
• 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
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Factors Considered in Patent Valuation
• Qualitative and quantitative characteristics of the patent(s),
including the specific patent claim
• Earnings capacity and profitability relating to the patent(s)
• The impact of known blocking patents
• Any current or previous licensing of the patent
• Legal rights and restrictions to the patent(s), including foreign
patent protection
• Contracts associated with the patent(s)
• Competition, barriers to entry and risks associated with the
patent(s)
• Product life cycles and positioning
• Historical growth and prospects for the future
• Alternative uses for the patent(s)
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Factors Considered in Trade Mark
Valuation
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Qualitative and quantitative characteristics of the trademark(s)
Earnings capacity and profitability relating to the trademark(s)
Market share supported by, or as a result of the trademark(s)
Market recognition analysis of the trademark(s)
Legal rights and restrictions to the trademark(s)
Contracts associated with the trademark(s)
Competition, barriers to entry and risks associated with the
trademark(s)
• Product life cycles and positioning
• Historical growth and prospects for the future
• Exploitation opportunities of the trademark(s) into new
markets/products
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Factors Considered in Brand Valuation
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Qualitative and quantitative characteristics of the brand name(s)
Earnings capacity and profitability relating to the brand name(s)
Market share supported by, or as a result of the brand name(s)
Market recognition analysis of the brand name(s)
Legal rights and restrictions to the brand name(s)
Contracts associated with the brand name(s)
Competition, barriers to entry and risks associated with the brand
name(s)
• Product life cycles and positioning
• Historical growth and prospects for the future
• Exploitation opportunities of the brand name(s) into new
markets/products
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IP AUDIT
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IP Audit: What is It?
• A systematic review of the IP assets owned, used or
acquired by a business
• IP Audit says
– How the IP assets are being used or not used
– Whether the IP assets used by it are owned by the
company or others
– Whether these IP assets are infringing the rights of others
or others are infringing on those rights, and determine, in
the light of all this information
– What actions are required to be taken w.r.t. each IP asset,
or portfolio of such assets to serve the relevant business
goals of the company
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IP Audit: Objective
• To uncover under-utilized IP assets
• To identify any threats to a company’s bottom line
• To enable business planners to devise informed
strategies that will maintain and improve the
company’s market position
“Overall purpose of an IP audit is to identify and
assess all of the company’s intangible assets in order
to conduct a SWOT (Strengths, Weaknesses,
Opportunities, and Threats) analysis to determine the
valuable core assets and optimize their usage through
a systematic long-term strategy”
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Steps ion IP Audit 1
• First Step: Investigation
All things created, developed or used by the
organisation such as, inventions, formulas,
processes, devices or other technologies,
creative works, such as music, books or
computer video games, business information,
including advertising, promotional materials,
customer lists, prospect lists, pricing
information, sales figures, financial projections
and other materials
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Steps in IP Audit 2
• Second Step: Identification
• Identify the readily identifiable IP
– Trademarks
– Copyrights
– Designs
– Patents
– Product/process Know-how
– Trade Secrets
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Steps in IP Audit- 3
• Third Step: Categorisation
– Owner
– Licensee
– Licensor
– Domestic
– Foreign
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Steps in IP Audit 4
• Fourth Step: Itemize external or market
influences
– company brand
– product brands
– company and product get-up
– Goodwill
– product certification
– export certifications
– Regulatory approvals
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Steps in IP Audit - 5
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Fifth Step: Examine Enforceability
Legal Provisions and Economics
Administrative Action
Legal Steps
– Civil Procedures
– Criminal Procedures
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An Inventory of IP Audit
• Whether or not your IP rights are registered;
• Whether you have any intellectual property issues and
what to do to address them;
• Who owns the rights and, if you not, identify any conditions
that apply to their use;
• An assessment of whether your IP is being used effectively;
• Whether your rights are being challenged or threatened by
others;
• Whether you have an effective IP management and
maintenance plan in place; and
• Records of your IP creation and ownership.
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Content of an IP Audit Report 1
• Inventory issues.
– A catalogue of intellectual property assets, including
disclosures, patents, trademarks, trade secrets, contracts,
agreements, and so on
• Rights issues.
– An understanding of rights that have been acquired, and
whether they have been properly maintained; an
understanding of those rights that have not been acquired
and whether or not they should be
• Ownership issues.
– Does the company have clear ownership over these
assets? Has title been properly assigned by
employees/consultants?
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Content of an IP Audit Report 2
• Infringement issues.
– Are patents being used for which the company does not
have rights?
• Strategic issues.
– Are these assets being properly managed and exploited in
alignment with the strategic objectives of the company?
Are there restrictions to their use?
• Deficiency issues.
– Are there patentable technologies currently not
protected? Are there copyright and trademark registration
applications to be filed? Are there affidavits of continued
use of trademarks, maintenance fees to keep patents in
force, and so on?
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When to do an IP Audit?
• General Purpose Audit:
– As part of an ongoing IP asset management
programme
• Event Driven:
– When a business is being bought, or sold
– When you are enforcing or defending your IP
rights.
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Dow Chemical Company
• IP Audit and asset management programme
started in 1992
• Classified entire IP portfolio including 30,000
patents
• A team of 9 people worked for 12 months
analysing the patents and recommending
maintenance or abandonment
• $ 40 million saving by abandoning some patents
• Started licensing which grew from $ 25 M to $
250 M in 5 years.
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Remember ...
• In 2005, Qualcomm generated about 58% of its
$5.7 billion in revenue from the sale of
Qualcomm‐designed wireless chips, which are
manufactured by third parties under contract
• Since 1993, IBM has been making some US$1
billion per year from licensing non‐core
technologies, which otherwise would have
remained unused.
• Honeywell, in 2000, received a then record award
of damages of US$127 million from Minolta for
technology it hadn’t itself commercialized.
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Remember ...
• The Coca‐cola brand is estimated to be worth
US$80 billion.
• US company Texas Instruments earns more
from licensing its unused patent rights than
from its products
Need IP Valuation, Audit and an Asset
Management strategy to optimise income
and profit
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Questions
For further information pl contact at
tcjames@nipo.in
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