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IP and Finance - Accounting and Valuation of IP Assets and IP-based Financing -

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Title: Slide 1 Author: Anthony Last modified by: NM Created Date: 2/11/2011 10:17:58 AM Document presentation format: On-screen Show (4:3) Company – PowerPoint PPT presentation

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Title: IP and Finance - Accounting and Valuation of IP Assets and IP-based Financing -


1
IP and Finance - Accounting and Valuation of IP
Assets and IP-based Financing - Topic 17 -
McLean Sibanda Training of the Trainers Program
on Effective Intellectual Property Asset
Management by Small and Medium Sized Enterprises
(SMEs) Organised by the World Intellectual
Property Organisation (WIPO) and the African
Regional Intellectual Property Organization
(ARIPO) Harare, Zimbabwe, 28th November 2014
2
Summary
  • Introduction
  • Valuation methods
  • Concluding Remarks

3
IntroductionDifferent Forms of Finance
High
Friends Family Fools
Angels
Venture Capitalists
Public Funds (grants, soft loans, etc.)
Risk
Private Equity
Equity markets
Commercial banks
Low
Seed Start-up
Early growth Established
Stage of development of the Investee
4
Introduction A Question of Value - Value must
exceed the price."
  • IP valuation is complex
  • Complex interaction of legal and business issues
    as well as uncertainties
  • What is the value put on table before
    prospective investors?

4
5
Introduction Importance of valuing IP
5
6
Introduction Importance of valuing IP
  • IP an asset / currency
  • IP an asset
  • Deal leveraging / cross licence)
  • Collateral / security
  • Sold / disposed of
  • Licenced / leased
  • Basis for a joint venture
  • Competitive advantage / market leadership
  • IP new currency in knowledge based economy

6
7
Introduction Fundamental Questions in Valuation
7
8
Introduction Fundamental Questions in Valuation
With IP
What is the value added by IP Assets?
Without IP
  • Competition
  • Regulatory
  • Etc.

How risky are the cash flows from both existing
assets and IP assets?
8
9
Introduction Factors Affecting Valuation
  • Quality of the IP Asset
  • Depth and breath of patent claims
  • Prosecution history
  • Territories granted
  • Distinguishing ability
  • Quality of underlying product
  • Time to market
  • Inherent commercialisation risk
  • Litigation / infringement

9
10
IP Valuation Different Valuation Methods
  • Cost method
  • Market method
  • Income
  • 25 rule (relief from royalty)
  • Discounted Cash Flow
  • Monte Carlo simulations

10
11
IP Valuation Cost Method
  • Recovery of costs incurred cost to redevelop
  • Does not consider the time value of money /
    opportunity cost
  • Not equate to value no link to future revenues
  • Typical in early stage technologies

11
12
IP Valuation Market Method
  • Comparison with similar technologies / products /
    transactions
  • Access to transactional information
  • In essence a guide

12
13
IP Valuation Market Method
  • Similar to real estate valuations
  • Similar transactions / Assets
  • Market method

13
14
IP Valuation Market Method
Use of the 25 Per Cent Rule in Valuing IP by
Robert Goldschreider, John Jarosz and Carla
Mulhern, Les Nouvelles December 2002 at p123)
Licensed royalty rates (late 1980s to 2000)     Royalty rates and successful licensee profits Royalty rates and successful licensee profits
Industry No licences Median royalty rate Avg operating profits Royalty as a of profit
Automotive 35 4.0 11.3 44.1
Chemicals 72 3.6 12.0 25.0
Computers 68 4.0 8.3 33.3
Consumer Goods 90 5.0 18.4 27.1
Electronics 132 4.0 13.1 34.3
Energy Environment 86 5.0 9.2 38.1
Food 32 2.8 14.2 15.8
Healthcare Products 280 4.8 18.5 21.6
Internet 47 7.5 10.4 48.0
Machine/Tools 84 4.5 9.6 35.0
Media Entertainment 19 8.0 -13.5 -66.7
Pharma Biotech 328 5.1 25.8 17.4
Semiconductors 78 3.2 31.9 7.8
Software 119 6.8 25.1 21.4
Telecom 63 4.7 14.5 34.5
Total 1533   18.8 26.6
14
15
Royalty Rates for Different Industries
Source Dan McGavock of IPC Group, Chicago Based
on survey results
16
Royalty Rates for Different IndustriesRoyaltySour
ce from Transaction Analysis
Industry Average Median Max Min Count Chemical
s 4.7 4.3 25.0 0.1 78 Internet
(incl software) 11.8 8.8 50.0 0.3
88 Telecom (excl Media) 4.9
4.5 15.5 0.4 73 Consumer Gds, Rtl Leis
5.5 5.0 28.0 0.1 98 Media
Entertainment 9.1 5.0 50.0 2.0
25 Food Processing 3.2 2.8 10.0 0.3
38 Medical/Health Products 6.1
5.0 77.0 0.1 376 Pharma Biotech
7.0 5.0 50.0 0.0 458 Energy
Environment 5.0 5.0 20.0 1.0
107 Machines/Tools 5.2 4.5 25.0 0.5
90 Automotive 4.3 3.5 15.0 0.5
59 Electrical Electronics 4.2
4.0 15.0 0.5 139 Semiconductors
4.3 3.0 30.0 0.0 75 Computers Office
Equip 5.3 4.0 25.0 0.2
73 Software 11.5 6.8 70.0 0.0
147 Industry Summary 6.40 4.80 1,924
17
IP Valuation Income Method
  • Based on future revenues
  • Generally for more mature technologies

17
18
IP Valuation25 Rule
Royalty 20 to 33 of PBIT
19
IP Valuation25 Rule
  • Value of trademarks used by a company
  • R100m turnover
  • Pays R4m in royalties
  • Generates R24m in profits (before royalties,
    interest and tax) (PBIT)

http//www.snz.co.za/articles/valuation/use-of-the
-25-rule/
20
IP Valuation25 Rule (cont)
  • Contrast with inappropriate valuation of same
    trademarks
  • R100m turnover
  • Pays R4m in royalties
  • Generates R24m in profits (before royalties,
    interest and tax) (PBIT)

http//www.snz.co.za/articles/valuation/use-of-the
-25-rule/
21
25 Rule - example
  • PBIT example
  • Sales R15,000,000
  • Cost of sales (R10,000,000)
  • Overheads (R2,000,000)
  • Interest (R500,000)
  • Tax (R600,000)
  • PBIT R3,000,000
  • Applying 25 Rule Royalty R750,000 pa
  • 5 of turnover (i.e. R750k/R15m)
  • Q What if you are already licensing in
    technology and paying R150,000 royalty?

22
IP ValuationDiscounted Cash-flow
  • Assumes revenues / cash-flows
  • Discount rate for risk
  • NPV

23
Discount rate
Discount rate Is a measure of risk
  • Unsystematic risk premium
  • Relative risk and return
  • Risk free rate 3
  • Mature product 10 (ie 2 UR)
  • Pre-national launch 15 (ie 7 premium)
  • Technology only is sure 25 (ie 12 premium)
  • Embryonic RD 50 (ie 42 premium)
  • (US info 5 SR)

24
IP ValuationValuation of Nascent / Early Stage
Technologies
  • Risks
  • Transition laboratory to large scale
    manufacturing / market adoption
  • Failure to be cost effective to manufacture
  • Stronger and newer competitive technology will
    emerge
  • Regulatory hurdles (e.g. undesirable side-effects
    in case of drugs)
  • May not achieve promised benefits
  • Cost approach most used for nascent / early stage
    IP
  • Cost approach doesnt consider patent monopoly
    value
  • Grossly undervalues IP in some cases
  • Other methods - Discounted cash flow,
    Monte-Carlo, 25 rule

25
Concluding Remarks
26
Concluding Remarks
  • Valuation complex and depends on a number of
    factors
  • Important that employ appropriate valuation
    method
  • Valuation done for variety of reasons
  • New investments
  • Capital raising
  • Commercialisation e.g. licensing or venture
    creation
  • Tax purposes
  • An art more than a science
  • Dont let valuation kill the deal!

27
THANK YOU
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