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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
Year 1 Year 2 Year 3 Year 4 Year 5
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
Year 1 Year 2 Year 3 Year 4 Year 5
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