Censere - Shenzhen - 13 Jan 2011(Eng-Chi) v.1.0

8/7/2019 Censere - Shenzhen - 13 Jan 2011(Eng-Chi) v.1.0

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Patent ValuationMethods & Practice


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Why Value IP?

What can be measured can be managed

Or, put another way...

In order to manage properly you must measure accurately

Regular valuation ofIP and monitoring of royalty rates is thebasis for successful commercialisation ofIP.


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Three Approaches to Valuation


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The Cost Approach

considers the cost to reproduce or replace in newcondition the assets appraised in accordance withcurrent market prices for similar assets, withallowance for accrued depreciation or obsolescencepresent, whether arising from physical, functionalor economic causes.


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The Cost Approach

Key Considerations:

Ability to accurately determine ReplacementCost New

Identify economic life versus physical or

statutory lifeAccurately assess all elements of depreciation


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The Cost Approach

:General drawbacks of the CostApproach:

Doesnt address economic aspects of ownership

Risks of not receiving economic benefits notaddressed

Some elements of depreciation difficult toquantify accurately


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The Market Approach

considers prices recently paid for similar assets,with adjustments made to market prices to reflectcondition and utility of the appraised assets relativeto the market comparative.


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The Market Approach

Pre-requisites for use of the Market Approach

Active market

There must be adequate numbers of transactionsavailable to be considered in the analysis

Public market All relevant information relating to the markettransactions must be known


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The Market Approach

:

General drawbacks of the MarketApproach:

It is an excellent approach, most easily understood bylay-people but often unusable due to either lack oftransactions or lack of data relating to sales.

All IA are unique need to make adjustments fordifferences between transacted assets and subject


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The Income Approach

is the conversion of expected periodic benefits of

ownership into an indication of value. It is basedon the principle that an informed buyer would pay

no more for an asset than an amount equal to thepresent worth of anticipated future benefits(income) from the same or a substantially similarasset with a similar risk profile.


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The Income Approach

Key considerations forIncomeApproach

Must be able to isolate earnings or cash flows directlyattributable to the asset being valued

Must identify current and possible applications of the

asset

Need to determine an appropriate multiple or discountrate supportable by market data


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The Income Approach

:General drawbacks of the IncomeApproach:

Earnings/cash flow forecasts are subject to manyassumptions, many of which are subjective to acertain extent

Determination of discount rate or earningsmultiple also difficult to prove objectively


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Common Valuation Methods

CostApproachCost to replicate

MarketApproachSales comparison method IncomeApproach

Relief from Royalties

Excess EarningsMulti-period Excess Earnings Method

Incremental Discounted Cash Flow


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Unique Features of Patents

Statutory life versus economic life

Every patent is unique no direct comparisons

Highest and best use is not always obvious value isdependent on the user/owner

Often rely on complementary assets to generate cash-flows

Can generate highest returns of any asset class, but also easilyeroded


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Focus on the Income Approach

Capitalised Income Method

/E

xcessE

arnings/R

esidualIncome

:

Various applications of the DCF method:

Relief From Royalty

P

remiumP

ricing Production Cost Savings

Multi-period Excess Earnings Method


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Valuation of Manufacturing Know-how

1,320,000Manufacturing Know-how value, rounded to

1,316,66730%Capitalised at

395,000Excess Earnings

1,105,000Total return on contributory assets

35,00010%350,000Receivables

10,0005%200,000Cash

60,00012%500,000Inventory

900,00018%5,000,000Machinery & Equipment

100,0005%2,000,000Land & Buildings

Less contributory asset charges:

1,500,000Divisional Earnings Before Interest

Example Residual Income


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Example Relief From Royalty

Relief from Royalty Analysis

Step 2 - Determine future relevant revenue of asset

Year 1 Year 2 Year 3 Year 4 Year 5

100,000 105,000 110,250 115,763 121,551

Step 3 - Determine after taxes royalty saving


Revenue 100,000 105,000 110,250 115,763 121,551

Royalty Saving (10%) 10,000 10,500 11,025 11,576 12,155

3,000 3,150 3,308 3,473 3,647

7,000 7,350 7,718 8,103 8,509

Step 5 Calculate the total present value of asset


After Tax Royalty 7,000 7,350 7,718 8,103 8,509

15% 15% 15% 15% 15%

0.86957 0.75614 0.65752 0.57175 0.49718

6,087 5,558 5,074 4,633 4,230

25,582

Step 1 - Determine royalty rate for comparable asset (e.g. 10% of revenue)

Revenue (Growth at 5%) - Step 2

Taxes (30%)

After Taxes Royalty - Step 3

Step 4 - Determine the discount rate of asset (e.g.15% )

Discount Rate

Discount Factor

Present Value

Total Value - Step 5

2008 Censere Group. All rights reserved.


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Key Inputs - Income Approach

/Detailed Revenue/P&L Forecasts

Possibly assist client to prepare

Royalty Rate/Licensing Rate

Based on existing/past licensing agreements and/ormarket investigation and/or econometric analysis

Costs of maintenance/support

Tax basis

D

iscountR

ate


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Sources of IP Revenue

Premium selling price

Price of subject product versus commodity product

Increased sales volumeSynergies or economies of scale Reduced costs

Less material wastageReduced energy costs

()Automation (reduced labourcosts)

Reduced risk/cost of funds


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Royalty Rate Study

Equitable Royalty Rate

Licensee Analysis

Market Analysis

Analysis of similar licensingagreements to derive market

benchmark

Econometric analysis toascertain benefits, risks,

rewards

25% Rule?


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25%25% Rule

25%25% of incremental gross profit should be

payable as a license fee for use ofIP

An arbitrary split which illustrates thatbulk of risk is usually borne by the licensee

Actual split is best determined afteranalysis of relative risks to each party


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Contact Details

Brett Shadbolt, CEO

Censere Group

Tel (Hong Kong) +852 2511 2011

Tel (Shanghai) +86 216249 7358

E-Mail [email protected]

Website http://www.censere.com

Documents

Censere - Shenzhen - 13 Jan 2011(Eng-Chi) v.1.0