Intellectual Property
Valuation
and
Finance
1
ON 12/31/99,
INVESTORS SAID P&G WAS WORTH
$ 151.6 BILLION
P&G’s FINANCIAL STATEMENTS
SAID IT WAS WORTH $ 32.1 BILLION
WHO WAS RIGHT ??
2
ON 12/31/99,
INVESTORS SAID P&G WAS WORTH
$ 151.6 BILLION
FIVE MONTHS LATER,
INVESTORS SAID P&G WAS WORTH
$ 94.2 BILLION
WHAT HAPPENED TO
$ 57.4 BILLION ??
3
Course Overview
•
•
•
•
•
•
•
Why Valuations are Necessary
Importance of IP Assets
Accounting Principles
Valuation Theory & Practice
Tax, Litigation & Finance
Working with a Valuation Expert
Case Studies
4
Why Valuations are Made
•
•
•
•
•
Transaction Support
Litigation Support
Regulatory Requirements
Accounting Requirements
Taxes - Federal, State Income - Estate Gift - ad valorem
• Financial
5
…from “Bricks and Mortar”
to
IP
6
INTANGIBLE ASSETS
•
Rights
•
Relationships
•
Intellectual Property
•
Undefined Intangibles
7
Rights
•
•
•
•
•
•
•
Leases
Distribution Agreements
Employment Contracts, Covenants
Financing Arrangements
Supply Contracts
Licenses, Certifications
Franchises
8
Relationships
• Trained and Assembled Workforce
• Customer Relationships
• Distribution Relationships
9
Intellectual Property
• Proprietary Technology
Trade Secrets
Know-how
• Patents
• Copyrights
• Trademarks
• Right of Publicity
10
Proprietary Technology
•
•
•
•
•
•
•
•
Formulas, Recipes, Specifications
Management, Accounting, Mfg. Procedures
Formations, Plays, Training programs
Marketing Strategies
Artistic Techniques
Customer Lists, Routes, Demographic Studies
Job Files, Product test results
Business Knowledge - Suppliers, Lead times,
Cost and pricing data
11
Undefined Intangibles
• Goodwill
• Elements of a Going Concern
(“going concern value”)
12
The Business Enterprise and
the Assets That Comprise It
13
Business Enterprise
MONETARY
ASSETS
VALUE OF
EQUITY
BUSINESS
ENTERPRISE
=
VALUE
OF
LONG-TERM
DEBT
=
TANGIBLE
ASSETS
INTANGIBLE
ASSETS
14
ELEMENTS OF THE BUSINESS
ENTERPRISE (monetary assets)
MONETARY ASSETS
Cash, Inventories, Work in Process,
Finished Goods, Accounts Receivable
LESS:
Accounts Payable and other Current
Liabilities
“Net Working Capital”
15
ELEMENTS OF THE BUSINESS
ENTERPRISE
TANGIBLE ASSETS
Land, Land Improvements, Buildings
Machinery and Equipment, Vehicles
“Plant, Property and Equipment”
16
ELEMENTS OF THE BUSINESS
ENTERPRISE
INTANGIBLE ASSETS
Computer Software, Assembled Workforce,
Favorable Contracts, Customer Relationships,
Intellectual Property
“Goodwill or (ugh!) Going Concern Value”
17
BUSINESS ENTERPRISE
is a PORTFOLIO
=
T - BILLS
MONEY MARKET
CORPORATE
BONDS
EQUITIES
LOTTERY
TICKETS
18
BUSINESS ASSET
CHARACTERISTICS
VALUE
IN USE
MONETARY
INTANGIBLE
TANGIBLE
CASH
RECEIVABLES
INVENTORY
RETURN
REQUIREMENT
FINANCING
INVESTMENT
QUALITIES
8 - 10 %
DEBT
LIQUID
VERSATILE
GENERAL
PURPOSE
10 - 15 %
VALUE IN
LIQUIDATION
SPECIAL
PURPOSE
15 - 40 %
EQUITY
NON-LIQUID
NARROW MARKET
19
RELATIONSHIP OF EARNINGS
AND VALUE
REPLACEMENT COST
REPLACEMENT COST
VALUE IN CONTINUED USE
0
(-)
ORDERLY LIQUIDATION VALUE
FORCED LIQUIDATION VALUE
SCRAP VALUE OF TANGIBLE ASSETS
(-) 0
EARNINGS
20
Balance Sheet View of
the Business Enterprise
Current Assets
Current Liabilities
Plant, Property
and
Equipment
Long-Term Debt
Other Assets
Stockholder’s
Equity
Intangible Assets
and
Intellectual Property
21
Value of
the Business Enterprise
VALUE OF:
VALUE OF:
C.A. less C.L.
Plant, Property
and
Equipment
Other Assets
Long-Term Debt
Stockholder’s
Equity
Intangible Assets
and
Intellectual Property
22
Basic Accounting Concepts
23
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (“GAAP”)
FASB - Financial Accounting Standards Board
SFAS - Statement of Financial Accounting Standards
APB - Accounting Principles Board
APB 99 - Opinions of APB
AICPA - American Institute of CPA’s
SAP - Statements of Position
GAP - Gordon’s Accounting Principles
24
PUBLIC vs. PRIVATE
IRS
IRS
SEC
PUBLIC
PRIVATE
STOCKHOLDERS
25
STOCKHOLDER
AUDITED FINANCIAL STATEMENTS
“These financial statements are the responsibility of the Company’s management.”
“Our responsibility is to express an opinion
on these financial statements based on our
audit.”
“In our opinion, the financial statements…
present fairly, in all material respects…the
financial position of …in conformity with
G.A.A.P.”
26
Business Transactions
Employees
Government
Suppliers
BUSINESS ENTERPRISE
Customers
Investors
Lenders
27
Balance Sheet
Current Assets
Current Liabilities
Plant, Property
and
Equipment
Long-Term Debt
Other Assets
Stockholder’s
Equity
ASSETS - what we
own
LIABILITIES - how we
financed what we own
28
THE PROCTER & GAMBLE COMPANY and SUBSIDIARIES
Consolidated Balance Sheets
($millions)
Years ended June 30,
ASSETS
Current Assets
Cash
Investments
Accounts Receivable
Inventories
Materials and Supplies
Work in Process
Finished Goods
Deferred Income Taxes
Prepaid Expenses
Total Current Assets
1999
1998
$ 2,294
506
2,940
$ 1,549
857
2,781
1,176
375
1,787
621
1,659
11,358
1,225
343
1,716
595
1,511
10,577
29
+
Current Assets
Cash
Investments
Accounts Receivable
Inventories
Materials and Supplies
Work in Process
Finished Goods
Deferred Income Taxes
Prepaid Expenses
$ 2,294
506
2,940
$ 1,549
857
2,781
1,176
375
1,728
621
1,659
11,299
1,225
343
1,716
595
1,511
10,577
Current Liabilities
Accounts Payable
$ 2,300
Accrued Liabilities
4,083
Taxes Payable
1,228
Debt due within one year
3,150
Total Current Liabilities 10,761
$ 2,051
3,942
976
2,281
9,250
Total Current Assets
=
Net Working Capital = Monetary Assets
30
Property, Plant, and Equipment
Buildings
Machinery and Equipment
Land
Less Accumulated Depreciation
Total Property, Plant, and Equipment
Goodwill and Other Intangible Assets
Goodwill
Trademarks and Other Intangible Assets
Less Accumulated Amortization
Total Goodwill and Other Intangible Assets
3,885
16,953
562
21,400
8,774
12,626
3,660
15,953
539
20,152
7,972
12,180
7,062
1,115
8,177
1,355
6,822
7,023
1,157
8,180
1169
7,011
31
LIABILITIES and SHAREHOLDERS' EQUITY
Current Liabilities
Accounts Payable
$ 2,300
Accrued Liabilities
4,083
Taxes Payable
1,228
Debt due within one year
3,150
Total Current Liabilities 10,761
Long-Term Debt
6,231
Deferred Income Taxes
362
Other Non-current Liabilities
2,701
Total Liabilities 20,055
$ 2,051
3,942
976
2,281
9,250
5,765
428
3,287
18,730
32
Flow of Funds
CURRENT
ASSETS
PLANT, PROP.
& EQUIP.
OTHER
ASSETS
REVENUE
COST OF
GOODS
EXPENSES
TAXES
PROFIT
CURRENT
LIABILITIES
LONG-TERM
DEBT
STOCKHOLDER
EQUITY
33
THE PROCTER & GAMBLE COMPANY and SUBSIDIARIES
Consolidated Statements of Earnings
($millions)
Gross Margin
1999
$38,125
21,206
16,919
1998
$37,154
21,064
16,090
1997
$35,764
20,316
15,448
Marketing, Research, Admin. Expenses
Operating Income
10,666
6,253
10,035
6,055
9,960
5,488
Earnings before Income Taxes
650
235
5,838
548
201
5,708
457
218
5,249
Net Earnings
2,075
$3,763
1,928
$3,780
1,834
$3,415
Years ended June 30,
Net Sales
Cost of Products Sold
Interest Expense
Other Income, net
Income Taxes
34
Gross Margin
1997
$38,125
21,206
16,919
%
100.0
55.6
44.4
1996
$37,154
21,064
16,090
%
100.0
56.7
43.3
1997
$35,764
20,316
15,448
%
100.0
56.8
43.2
Marketing and Administration Expense
Research and Development Expense
Advertising Expense
Operating Income
5,402
1,726
3,538
6,253
14.2
4.5
9.3
4,785
1,546
3,704
6,055
12.9
4.2
10.0
4,927
1,282
3,468
5,771
13.8
3.6
9.7
Interest Expense
Other Income, net
1.7
0.6
548
201
5,708
1.5
0.5
457
218
5,532
1.3
0.6
Earnings before Income Taxes
650
235
5,838
Net Earnings
2,075
$3,763
5.4
9.9
1,928
$3,780
5.2
10.2
1,834
$3,698
5.1
10.3
Years ended June 30,
Net Sales
Cost of Products Sold
Income Taxes
Depreciation and Amortization
Gross Cash Flow
Capital Expenditures
Net Cash Flow
2,148
$5,911
2,828
$3,083
1,598
$5,378
2,559
$2,819
1,487
$5,185
2,129
$3,056
35
THE PROCTER & GAMBLE COMPANY and SUBSIDIARIES
Consolidated Statements of Cash Flows
($millions)
Years ended June 30,
Cash and Equivalents, Beginning of Year
Operating Activities
Net Earnings
Depreciation and Amortization
Deferred Income Taxes
Other
Investing Activities
Capital Expenditures
Proceeds from Asset Sales
Acquisitions
Change in Investment Securities
Financing Activities
Dividends to Shareholders
Additions to Long-term Debt
Reductions in Long-term Debt
Other
Treasury Purchases
Effect of Exchange Rate Changes
1999
$1,549
1998
$2,028
1997
$2,074
3,763
2,148
-60
-307
5,544
3,046
1,358
328
-574
4,158
3,415
1,487
-26
1,006
5,882
-2,828
434
-137
356
-2,175
-2,179
402
-358
-331
-2,466
-2,129
520
-150
-309
-2,068
(1,626)
986
(334)
921
(2,553)
-2606
(1,462)
1,970
(432)
1,473
(1,929)
-380
(1,329)
224
(724)
(26)
(1,652)
-3507
-18
-96
-31
36
Basic Valuation Principles
37
PREMISE OF VALUE
•
•
•
•
•
Cost of Reproduction
Cost of Replacement
Book Value
Tax Basis
Fair Market Value
Market Value, Fair Value, Exchange Value
Orderly / Forced Liquidation Value,
Investment Value
38
PREMISE OF VALUE
FAIR MARKET VALUE
“The amount at which a property would exchange
between a willing buyer and seller, neither under
compulsion, each having knowledge of the facts,
and with equity to both.”
or
“The present value of the future economic benefits
of ownership.”
39
PREMISE OF VALUE
FAIR MARKET VALUE
“The amount at which a property would exchange
between a willing buyer and seller, neither under
compulsion, each having knowledge of the facts,
and with equity to both.”
or
“The present value of the future economic benefits
of ownership.”
40
VALUING A BUSINESS
THE BUSINESS ENTERPRISE
(PORTFOLIO)
THE UNDERLYING ASSETS
(AS ELEMENTS OF PORTFOLIO)
THE UNDERLYING ASSETS
(FOR ALTERNATE USE)
41
VALUATION METHODS
• Cost Approach
• Market Approach
• Income approach
42
COST APPROACH
Cost of Reproduction or
Cost of Replacement
Less: Physical Depreciation
Less: Functional Obsolescence
Equals: Replacement Cost Less Depreciation
Less: Economic Obsolescence
Equals: FAIR MARKET VALUE
43
MARKET APPROACH
Analyze evidence of transactions of:
•
•
•
•
Comparable Property
At Arm’s Length
Contemporaneous to Appraisal
In an Active, Public Market
44
INCOME APPROACH
RISK
AMOUNT
DURATION
45
PRESENT VALUE (direct cap)
DIRECT CAPITALIZATION
AMOUNT ($)
PV =
RATE (%)
Used when we are to receive an unchanging amount
in each period into perpetuity
46
PRESENT VALUE (direct cap with
growth)
DIRECT CAPITALIZATION with GROWTH
AMOUNT x (1 + Growth Rate)
PV =
(Rate - Growth Rate)
Used when we are to receive a constantly growing
amount each year into perpetuity
47
PRESENT VALUE (discounting)
DISCOUNTING
AMOUNT 1
PV =
AMOUNT 2
+
(1 + Rate)
AMOUNT 3
+
(1 + Rate)^2
+
….
(1 + Rate)^3
Used when we are to receive varying amounts
in each period for a finite number of periods.
48
PRESENT VALUE of $ 300,000
To be received in:
1 YEAR
2 YEARS 5 YEARS 10 YEARS
@ 4% $288,000 $277,000 $246,000 $201,000
@ 15% 258,000
223,000
142,000
68,000
@ 25% 234,000
183,000
87,000
25,000
49
INCOME APPROACH (NPV = PV
future benefits..)
RISK
=
NET PRESENT
VALUE
AMOUNT
DURATION
“The present value of the future economic benefits
of ownership.”
50
QUANTIFYING THE ECONOMIC
ADVANTAGE
Enables the use of lower cost materials
Enables the use of less material
Reduces the amount of labor
Increases speed of production
Improves quality / Reduces defects
Eliminates or reduces environmental and/or safety
hazards
Results in premium pricing
Provides economies of scale
Provides purchasing power
Relieves the owner of the cost to create
51
INCOME RISK
• WILL WE RECEIVE IT ?
• WILL WE RECEIVE IT IN THE EXPECTED
AMOUNT ?
• WILL WE RECEIVE IT WHEN EXPECTED ?
• MUST WE INVEST TO GET IT ?
• MUST WE INVEST IN “BIG LUMPS” ?
• HOW LONG MUST WE WAIT FOR INCOME
TO START ?
52
RATES OF RETURN
5.90- 6.7% - CD’s, Treasury Bills
6.05% - 30-year Treasury bonds
8.00% - 30-year mortgage commitments
8.00-10.00% - Corporate bonds
9.50% - Prime rate
9.00-15.00% - High-yield bonds
10.05-11.05% - Large company equities (Treasury plus
4-5%)
12.05-15.05% - Small company equities (plus 6-8%)
20% - 2nd or 3rd stage venture capital
40% - Venture capital, early commercialization
50% - Venture capital, early stage
53
INCOME DURATION (economic life
vs. legal…)
ECONOMIC LIFE =
MAY OR MAY NOT BE =
the period during which
it is profitable to use an
asset
Legal Life
Physical Life
Technological Life
Depreciable Life
54
TRANSFER OF VALUE BETWEEN
FORMS OF INTELLECTUAL
PROPERTY
100
90
80
70
60
50
40
30
20
10
0
Trademark
Patent
55
PRIMARY
SECONDARY
WEAK
Patents and Technology
Income
Marke t
Cost
Trademarks and Brands
Income
Marke t
Cost
Copyrights
Income
Marke t
Cost
Assembled Workforce
Cost
Income
Marke t
Management Information Software
Cost
Marke t
Income
Product Software
Income
Marke t
Cost
Distribution Networks
Cost
Income
Marke t
Core Deposits
Income
Marke t
Cost
Customer Relationships
Cost
Income
Marke t
Franchise Rights
Income
Marke t
Cost
Corporate Practices and Procedures
Cost
Income
Marke t
Elements of a Going Concern
Cost
Income
Marke t
Goodwill
Marke t (1)
Income (2)
-
(1) Residual based on enterprise market value
(2) Capitalization of "excess" income
Figure 11.2 Valuation Method Preferences
56
MERCK & CO., INC. a nd SUBSIDIARIES
Va lua tion of Unde rlying Asse ts
($millions)
1999
Y ears ended December 31,
Curre nt Asse ts
Cash
Short-term Investments
Accounts Receivable
Inventories
Prepaid Expenses and Taxes
Total Current Assets
Curre nt Lia bilitie s
Accounts Payable
Loans and Current Portion of Long-term Debt
Income Taxes Payable
Dividends Payable
Total Current Liabilities
MONETARY ASSETS (ne t w orking ca pita l)
$
2,021.9
1,180.5
4,089.0
2,846.9
1,120.9
11,259.2
$
2,606.2
749.5
3,374.1
2,623.9
874.8
10,228.5
$
4,158.7
2,859.0
1,064.1
677.0
8,758.8
$
3,682.1
624.2
1,125.1
637.4
6,068.8
$
2,500.4
$
4,159.7
Inve stme nts
Prope rty, Pla nt a nd Equipme nt
Land
Buildings
Machinery, Equipment and Office Furnishings
Construction in Progress
Less Allowance for Depreciation
TANGIBLE ASSETS
BUSINESS ENTERPRISE VALUE
Common Shares Outstanding (millions)
Year-end Price
Common Equity Value (millions)
Long-term Debt (millions)
LESS:
Value of Monetary Assets
Value of Investments
Value of Tangible Assets
EQUALS:
Va lue of Inta ngible Asse ts
1998
4,761.5
3,607.7
259.2
4,465.8
7,385.7
2,236.3
14,347.0
4,670.3
9,676.7
$ 12,011.9
228.8
3,664.0
6,211.7
1,782.1
11,886.6
4,042.8
7,843.8
$
9,865.2
2,968.0
$67.25
$199,598.0
3,143.9
$202,741.9
$
2,500.4
4,761.5
12,011.9
183,468.2
57
SALES /
R&D
MARKETING
MANUFACTURING
TRADEMARKS
1
2
PATENTS
3
4
PROPRIETARY
ENGINEERING
5
6
7
8
11
12
ADMINISTRATION /
PURCHASING
FINANCE
9
10
TECHNOLOGY
RECORDS AND
DRAWINGS
SOFTWARE
COPYRIGHTS
14
PROVIDING
16
13
15
CONTRACTS
RECEIVING
17
CONTRACTS
CUSTOMER
18
RELATIONSHIPS
Figure 8.10 Sources of Information about Intangible Assets
58
Home
Products
Cosmetics
Office
Products
Health
Foods
Auto
Products
Figure 8.6 Disaggregating the Business Enterprise
59
Home
Products
Cosmetics
Product 3
Product 2
Office
Products
Health
Foods
Product 1
Auto
Products
Figure 8.7 Disaggregating the Business Segment
60
Intangible
Monetary
Brand
Product 1
Tangible
Figure 8.8 Disaggregating the Product Line
61
FIGURE 3.4
DEBT
CAPITAL
TOTAL
EARNINGS
BUSINESS
Te
ENTERPRISE
PORTFOLIO
EQUITY
CAPITAL
Ie
Me
Te
MONETARY
ASSETS
+
TANGIBLE
ASSETS
+
INTANGIBLE
ASSETS
62
FIGURE 3.5
TOTAL
EARNINGS
Te
Ie
EARNINGS ATTRIBUTABLE
TO INTANGIBLE ASSETS
IAe
IDENTIFIED
INTANGIBLES
TRADEMARKS
IPe
INTELLECTUAL
PROPERTY
PTe
COPYRIGHTS
PATENTED
TECHNOLOGIES
STe
SPECIFIC
TECHNOLOGY
63
TABLE A.1
Business Enterprise Weighted Cost of Capital
INVESTED CAPITAL
COMPONENT
EQUITY
DEBT
TOTAL
PERCENT OF
AMOUNT
INVESTED
($ MILLIONS) CAPITAL
75.0
25.0
---------------100.0
75.0%
25.0%
---------------100.0%
COST OF
CAPITAL
14.0%
7.0%
AFTER TAX
COST OF
CAPITAL
WEIGHTED
AVERAGE
COST OF
CAPITAL
14.0%
4.2%
10.5%
1.1%
---------------11.6%
Required Rate of Return Among Assets
ASSET CATEGORY
NET WORKING CAPITAL
TANGIBLE ASSETS
INTANGIBLE ASSETS
TOTAL
PERCENT OF
AMOUNT
INVESTED
RETURN
($MILLIONS)
CAPITAL
REQUIRED
20.0
30.0
50.0
---------------100.0
20.0%
30.0%
50.0%
---------------100.0%
5.0%
7.0%
17.0%
WEIGHTED PERCENT OF
RETURN
TOTAL
REQUIRED
RETURN
1.0%
2.1%
8.5%
---------------11.6%
8.6%
18.1%
73.3%
---------------100.0%
64
Allocating Income Among Assets
ASSET CATEGORY
NET WORKING CAPITAL
TANGIBLE ASSETS
INTANGIBLE ASSETS
INTELLECTUAL PROPERTY
TOTAL
PATENTS
PROPRIETARY TECHNOLOGY
TRADEMARKS
ASSET
VALUE
($ 000's)
RETURNS
REQUIRED
AMOUNT OF
RETURN
($ 000's)
90,000
125,000
6.0%
9.0%
5,400
11,250
35,000
14.0%
4,900
50,000
---------------300,000
17.0%
---------------10.0%
8,500
---------------30,050
10,000
15,000
25,000
---------------50,000
14.5%
20.3%
16.0%
---------------17.0%
1,450
3,050
4,000
---------------8,500
65
Allocating Weighted Average Cost of Capital Among Assets
ASSET CATEGORY
NET WORKING CAPITAL
TANGIBLE ASSETS
INTANGIBLE ASSETS
Computer Software
Assembled Workforce
Trademarks
TOTAL
ASSET PERCENT OF
VALUE ENTERPRISE RETURNS
($MILLIONS)
VALUE
REQUIRED
WEIGHTED
AVERAGE
COST OF
CAPITAL
20.0
30.0
20.0%
30.0%
5.0%
7.0%
1.0%
2.1%
5.0
8.0
37.0
---------------100.0
5.0%
8.0%
37.0%
---------------100.0%
10.0%
15.0%
18.5%
0.5%
1.2%
6.8%
---------------11.6%
66
QUALITATIVE
QUANTITATIVE
DATA GATHERING
INTERVIEWS WITH
MANAGEMENT
REVIEW
FINANCIALS
Analyze
Feasability
Studies
Disaggregate
to Products
Analyze
Business
Plans
Trademarked
Product
Financials
Review
Projections
Market
Royalty Rate
Investigation
Analyze
Marketing
Data
Analyze
Monetary
Assets
Independent
Market
Research
Analyze
Market Research
Data
Analyze
Tangible
Assets
Research
Comparable
Transactions
Analyze
Other Intangible
Assets
Develop
Cash Flow
Forecasts
Comparable
Company
Analysis
Conclude
Preliminary Asset
Values
Correlate
Returns by
Asset Class
Investment
Rate of Return
Analysis
Correlate
Asset Values
and
Business Enterprise
Value
CONCLUDE
TRADEMARK
VALUES
CONCLUDE
ROYALTY
RATES
BUSINESS
ENTERPRISE
VALUATION
Industry
Data
General
Economic
Conditions
TRADEMARK VALUATION AND
ROYALTY RATE
DEVELOPMENT
DISCOUNTED CASH FLOW
YEAR 1
YEAR 2
YEAR 3
YEAR 4
REVENUES
REVENUES
REVENUES
REVENUES
EXPENSES
EXPENSES
EXPENSES
EXPENSES
NET INCOME NET INCOME NET INCOME NET INCOME
CAPITAL +
NON-CASH
NET CASH
FLOW
PRESENT
VALUE
CAPITAL +
NON-CASH
NET CASH
FLOW
PRESENT
VALUE
CAPITAL +
NON-CASH
NET CASH
FLOW
PRESENT
VALUE
CAPITAL +
NON-CASH
NET CASH
FLOW
PRESENT
VALUE
68
DISCOUNTED CASH FLOW MODEL - BASE CASE
SALES
COST OF GOODS SOLD
GROSS PROFIT
OPERATING EXPENSES
GENERAL & ADMINISTRATIVE
INCOME BEFORE TAXES
INCOME TAXES
NET INCOME
$
DEPRECIATION
ADDITIONS TO NWC
ADDITIONS TO PLANT
NET CASH FLOW
PRESENT VALUE
TOTAL PRESENT VALUE
$10,000
$11,000
$12,000
$14,000
$15,000
4,000
4,400
4,800
5,600
6,000
6,000
6,600
7,200
8,400
9,000
3,000
1,500
3,300
1,650
3,600
1,800
4,200
2,100
4,500
2,250
1,500
1,650
1,800
2,100
2,250
600
660
720
840
900
900
$
990
$
1,080
$
1,260
$
1,350
200
0
50
200
50
50
200
100
150
300
200
75
300
50
75
$1,050
$1,090
$1,030
$1,285
$1,525
$884
$726
$788
$813
$979
$4,190
69
TABLE 4.11
USING MARKET ROYALTY RATES
FANCY COMPANY, INC.
Sales Revenue
1
2
3
4
5
$
373,500 $
388,440 $
387,754 $
386,391 $
347,448 $ 1,883,533
$
5%
-----------18,675 $
5%
-----------19,422 $
5%
-----------19,388 $
5%
-----------19,320 $
5%
-----------17,372 $
Trademark Royalty Rate
Income Attributable to Trademark
TOTAL
94,177
TABLE 6.7
RELIEF FROM ROYALTY VALUATION
FANCY COMPANY, INC.
1
2
3
4
5
$
373,500 $
388,440 $
387,754 $
386,391 $
347,448
Income Attributable to Trademark
$
5%
-----------18,675 $
5%
-----------19,422 $
5%
-----------19,388 $
5%
-----------19,320 $
5%
-----------17,372
INCOME ATTRIBUTABLE TO TRADEMARK
Less: Income Taxes
$
$
After-tax Income Attributable to Trademark
$
18,675 $
7,470 $
-----------11,205 $
19,422 $
7,769 $
-----------11,653 $
19,388 $
7,755 $
-----------11,633 $
19,320 $
7,728 $
-----------11,592 $
17,372
6,949
-----------10,423
Present Value of After-tax Income
$
10,391 $
9,294 $
7,979 $
6,837 $
$
39,788
Sales Revenue
Trademark Royalty Rate
TOTAL PRESENT VALUE
5,288
70
TABLE 6.4
VALUATION OF PREMIUM PRICE ADVANTAGE
FANCY COMPANY, INC.
1
2
3
4
5
SALES OF PREMIUM PRICED PRODUCT
Unit Sales Forecast
Price per Unit
$
Sales Revenue
$
150,000 $
2.49
-----------373,500 $
156,000 $
2.49
-----------388,440 $
162,240 $
2.49
-----------403,978 $
168,730 $
2.49
-----------420,137 $
175,479
2.49
-----------436,942
PLAIN COMPANY, INC.
SALES OF GENERIC PRODUCT
Unit Sales Forecast
Price per Unit
Sales Revenue
$
150,000
$
2
-----------$
328,500
INCOME ATTRIBUTABLE TO TRADEMARK
Less: Income Taxes
$
$
After-tax Income Attributable to Trademark
Present Value of After-tax Income
TOTAL PRESENT VALUE
$
156,000
$
2
-----------$
341,640
$
162,240
$
2
-----------$
355,306
$
168,730
$
2
-----------$
369,518
$
175,479
$
2
-----------$
384,299
$
45,000 $
18,000 $
-----------27,000 $
46,800 $
18,720 $
-----------28,080 $
48,672 $
19,469 $
-----------29,203 $
50,619 $
20,248 $
-----------30,371 $
$
25,288 $
23,070 $
21,046 $
19,200 $
$
52,644
21,057
-----------31,586
17,516
106,119
71
TABLE 6.5
VALUATION OF GROSS PROFIT ADVANTAGE
PLAIN COMPANY, INC.
1
2
3
4
5
TOTAL
SALES OF GENERIC PRODUCT
Unit Sales Forecast
Price per Unit
$
150,000
2.19
-----------328,500
1.50
225,000
-----------103,500
$
Sales Revenue
Cost of Goods Sold PER UNIT
Cost of Goods Sold
$
$
$
Gross Profit
$
156,000
2.19
-----------341,640
1.50
234,000
-----------107,640
$
750,000
2.19
-----------$ 1,642,500
1.65
$ 1,237,500
-----------$
405,000
$
780,000
2.19
-----------$ 1,708,200
1.65
$ 1,287,000
-----------$
421,200
$
$
$
$
$
162,240
2.19
-----------355,306
1.50
243,360
-----------111,946
$
811,200
2.19
-----------$ 1,776,528
1.65
$ 1,338,480
-----------$
438,048
$
$
$
$
$
168,730
2.19
-----------369,518
1.50
253,094
-----------116,423
$
843,648
2.19
-----------$ 1,847,589
1.65
$ 1,392,019
-----------$
455,570
$
$
$
$
$
$
$
$
$
175,479
2.19
-----------384,299 $
1.50
263,218
-----------121,080 $
1,779,262
560,589
31.51%
COMPARABLE COMPANY GROUP
SALES OF GENERIC PRODUCT
Unit Sales Forecast
Price per Unit
Sales Revenue
Cost of Goods Sold PER UNIT
Cost of Goods Sold
Gross Profit
$
GROSS PROFIT ATTRIBUTABLE TO TRADEMARK$
Less: Income Taxes
$
After-tax Income Attributable to Trademark
$
22,500 $
9,000 $
-----------13,500 $
Present Value of After-tax Income
$
12,644 $
$
53,059
TOTAL PRESENT VALUE
877,394
2.19
-----------$ 1,921,493 $
1.65
$ 1,447,700
-----------$
473,793 $
23,400 $
9,360 $
-----------14,040 $
24,336 $
9,734 $
-----------14,602 $
25,309 $
10,124 $
-----------15,186 $
11,535 $
10,523 $
9,600 $
8,896,310
2,193,611
24.66%
26,322
10,529
-----------15,793
8,758
72
TABLE 6.6
VALUATION OF OPERATING PROFIT ADVANTAGE
PLAIN COMPANY, INC.
1
2
3
4
5
TOTAL
SALES OF GENERIC PRODUCT
Unit Sales Forecast
Price per Unit
$
$
$
$
$
Selling, General and Administrative Expenses
$
Operating Profit
Operating Profit Percentage of Sales
$
49,275 $
-----------54,225 $
16.5%
51,246 $
-----------56,394 $
16.5%
53,296 $
-----------58,650 $
16.5%
55,428 $
-----------60,996 $
16.5%
Sales Revenue
Cost of Goods Sold PER UNIT
Cost of Goods Sold
Gross Profit
150,000
2.19
-----------$
328,500
1.50
$
225,000
-----------$
103,500
156,000
2.19
-----------$
341,640
1.50
$
234,000
-----------$
107,640
162,240
2.19
-----------$
355,306
1.50
$
243,360
-----------$
111,946
168,730
2.19
-----------$
369,518
1.50
$
253,094
-----------$
116,423
175,479
2.19
-----------$
384,299 $ 1,779,262
1.50
$
263,218
-----------$
121,080
57,645
-----------63,436 $
16.5%
293,700
16.5%
COMPARABLE COMPANY GROUP
SALES OF GENERIC PRODUCT
Unit Sales Forecast
Price per Unit
$
$
$
$
$
Selling, General and Administrative Expenses
$
Operating Profit
Operating Profit Percentage of Sales
$
295,650 $
-----------109,350 $
6.7%
307,476 $
-----------113,724 $
6.7%
319,775 $
-----------118,273 $
6.7%
332,566 $
-----------123,004 $
6.7%
345,869
-----------127,924 $
6.7%
32,355 $
12,942 $
-----------19,413 $
33,649 $
13,460 $
-----------20,190 $
34,995 $
13,998 $
-----------20,997 $
36,395 $
14,558 $
-----------21,837 $
37,851
15,140
-----------22,710
Sales Revenue
Cost of Goods Sold PER UNIT
Cost of Goods Sold
Gross Profit
750,000
2.19
-----------$ 1,642,500
1.65
$ 1,237,500
-----------$
405,000
OPERATING PROFIT ATTRIBUTABLE TO TRADEMARK $
Less: Income Taxes
$
After-tax Revenue Attributable to Trademark
$
Present Value of After-tax Revenue
$
18,182
$
76,299
780,000
2.19
-----------$ 1,708,200
1.65
$ 1,287,000
-----------$
421,200
$
16,587
811,200
2.19
-----------$ 1,776,528
1.65
$ 1,338,480
-----------$
438,048
$
15,132
843,648
2.19
-----------$ 1,847,589
1.65
$ 1,392,019
-----------$
455,570
$
13,805
877,394
2.19
-----------$ 1,921,493 $ 8,896,310
1.65
$ 1,447,700
-----------$
473,793
$
12,594
73
TOTAL PRESENT VALUE
592,275
6.7%
TABLE 6.10
TRADEMARK VALUATION - MULTIPLE EXPLOITATION SCENARIOS
YEAR 1
PRIMARY EXPLOITATION
Net Cash Flow
YEAR 2
YEAR 3
YEAR 4
YEAR 5 REVERSION TOTAL
$
1,200 $
1,300 $
1,500 $
1,600 $
Present Value of Net Cash Flow
16.0% $
1,114 $
1,041 $
1,035 $
952 $
872 $
SECONDARY EXPLOITATIONS
Similar Product Extensions
Net Cash Flow
$
650 $
700 $
800 $
900 $
950
Present Value of Net Cash Flow
17.0% $
601 $
553 $
540 $
520 $
469 $
$
150 $
250 $
400 $
450 $
500
20.0% $
137 $
190 $
254 $
238 $
220 $
$
50 $
60 $
70 $
80 $
90
20.0% $
46 $
46 $
44 $
42 $
40 $
$
100 $
300 $
500 $
800 $
25.0% $
89 $
215 $
286 $
366 $
Dissimilar Product Extensions
Net Cash Flow
Present Value of Net Cash Flow
Licensing Income
Net Cash Flow
Present Value of Net Cash Flow
Speculative Extensions
Net Cash Flow
Present Value of Net Cash Flow
1,700
5,781 $
10,794
2,861 $
5,544
1,079 $
2,118
194 $
412
1,200
440 $
TOTAL PRESENT VALUE
1,599 $
2,995
------------$
21,862
74
TRADEMARK VALUATION by ALLOCATION of INCOME
Monetary Assets
ASSET
FMV
($000)
$ 50,000
PERCENT
(%)
4.55%
RETURN
RATE
7.0%
Tangible Assets
750,000
68.18%
12.0%
8.18%
63.60%
89,046
Other Intangibles
200,000
18.18%
15.0%
2.73%
21.20%
29,682
9.09%
--------------100.00%
18.0%
ASSET CLASS
Trademarks
Business Enterprise Value
100,000
--------------$ 1,100,000
WEIGHTED
RATE
0.32%
1.64%
--------------12.86%
PERCENT
(%)
2.47%
12.72%
--------------100.00%
EARNINGS
ALLOCATION
($000)
$
3,463
17,809
--------------$ 140,000
75
ROYALTIES
THE BURNING QUESTION
76
THE LICENSING TRANSACTION
ROYALTY
LICENSOR
LICENSEE
77
THE LICENSING TRANSACTION
LICENSOR
INCOME
A
ROYALTY
C
LICENSOR
LICENSEE
LICENSEE
INCOME
B
78
THE LICENSING TRANSACTION
LICENSEE
INCOME
LICENSEE
LICENSOR
ROYALTY
79
THE LICENSING TRANSACTION
IS CONTROLLED BY THE
ECONOMICS OF
THE LICENSEE’S BUSINESS
80
COST APPROACH ROYALTY
What did it cost to develop the IP ?
Set a royalty that will recoup the cost.
NO !!
81
MARKET APPROACH ROYALTY
What royalties have others paid or
received ?
What is the “industry standard” ?
MAYBE !!
82
INCOME APPROACH ROYALTY
What is the economic benefit to the
licensee ?
What is our proper share ?
YES !!
83
DISCOUNTED CASH FLOW MODEL - BASE CASE
SALES
COST OF GOODS SOLD
GROSS PROFIT
OPERATING EXPENSES
GENERAL & ADMINISTRATIVE
INCOME BEFORE TAXES
INCOME TAXES
NET INCOME
$
DEPRECIATION
ADDITIONS TO NWC
ADDITIONS TO PLANT
NET CASH FLOW
PRESENT VALUE
TOTAL PRESENT VALUE
$10,000
$11,000
$12,000
$14,000
$15,000
4,000
4,400
4,800
5,600
6,000
6,000
6,600
7,200
8,400
9,000
3,000
1,500
3,300
1,650
3,600
1,800
4,200
2,100
4,500
2,250
1,500
1,650
1,800
2,100
2,250
600
660
720
840
900
900
$
990
$
1,080
$
1,260
$
1,350
200
0
50
200
50
50
200
100
150
300
200
75
300
50
75
$1,050
$1,090
$1,030
$1,285
$1,525
$884
$726
$788
$813
$979
$4,190
84
DISCOUNTED CASH FLOW MODEL - WITH BENEFIT OF IP
SALES
COST OF GOODS SOLD
GROSS PROFIT
OPERATING EXPENSES
GENERAL & ADMINISTRATIVE
INCOME BEFORE TAXES
INCOME TAXES
NET INCOME
$
DEPRECIATION
ADDITIONS TO NWC
ADDITIONS TO PLANT
NET CASH FLOW
PRESENT VALUE
TOTAL PRESENT VALUE
$10,000
$11,000
$12,000
$14,000
$15,000
3,600
3,960
4,320
5,040
5,400
6,400
7,040
7,680
8,960
9,600
3,000
1,500
3,300
1,650
3,600
1,800
4,200
2,100
4,500
2,250
1,900
2,090
2,280
2,660
2,850
760
836
912
1,064
1,140
1,140
$
1,254
$
1,368
$
1,596
$
1,710
200
0
50
200
50
50
200
100
150
300
200
75
300
50
75
$1,290
$1,354
$1,318
$1,621
$1,885
$929
$994
$1,203
$5,229
$1,098
$1,005
85
DISCOUNTED CASH FLOW MODEL - WITH ROYALTY PAYMENT
SALES
COST OF GOODS SOLD
GROSS PROFIT
ROYALTY EXPENSE
OPERATING EXPENSES
GENERAL & ADMINISTRATIVE
4.0%
INCOME BEFORE TAXES
INCOME TAXES
NET INCOME
$
DEPRECIATION
ADDITIONS TO NWC
ADDITIONS TO PLANT
$10,000
$11,000
$12,000
$14,000
$15,000
3,600
3,960
4,320
5,040
5,400
6,400
7,040
7,680
8,960
9,600
400
3,000
1,500
440
3,300
1,650
480
3,600
1,800
560
4,200
2,100
600
4,500
2,250
1,500
1,650
1,800
2,100
2,250
600
660
720
840
900
900
$
990
$
1,080
$
1,260
$
1,350
200
0
50
200
50
50
200
100
150
300
200
75
300
50
75
NET CASH FLOW
$1,050
$1,090
$1,030
$1,285
$1,525
PRESENT VALUE
TOTAL PRESENT VALUE
$979
$4,190
$884
$726
$788
$813
86
Allocating Income Among Assets to Calculate a Royalty
ASSET
VALUE
($ 000's)
RETURNS
REQUIRED
AMOUNT OF
RETURN
($ 000's)
90,000
125,000
6.0%
9.0%
5,400
11,250
35,000
14.0%
4,900
50,000
---------------TOTAL
300,000
17.0%
---------------10.0%
8,500
---------------30,050
10,000
15,000
25,000
---------------50,000
14.5%
20.3%
16.0%
---------------17.0%
1,450
3,050
4,000
---------------8,500
ASSET CATEGORY
NET WORKING CAPITAL
TANGIBLE ASSETS
INTANGIBLE ASSETS
INTELLECTUAL PROPERTY
PATENTS
PROPRIETARY TECHNOLOGY
TRADEMARKS
SALES REVENUE (from Figure 4.7)
328,500
INCOME ALLOCABLE TO TRADEMARKS
8,500
INDICATED ROYALTY RATE
2.6%
87
UNIFORM STANDARDS of
PROFESSIONAL APPRAISAL
PRACTICE (“USPAP”)
• Ethical Standards
• Minimum Work Standards
• Client Relationships
• Minimum Reporting Standards
88
VALUATION ENGAGEMENT
• Client Arrangements
• Investigation / Data Gathering
• Analysis
• Report Writing
89
EXPLOITATION
KEEP IT ? SELL IT ?
LICENSE IT ?
ENHANCE IT ?
90
EVALUATING EXPLOITATIONS
•
•
•
•
•
•
Commercialize
Enhance
Sell
License out
License in comp.
Joint venture
45
40
35
30
25
20
15
10
5
0
91