Into the New Economy: New Assets, Valuation Techniques, Regulations & Issues

8/8/2019 Into the New Economy: New Assets, Valuation Techniques, Regulations & Issues

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Reprinted from the June 2008 Issue, Vol. 6, No. 6

2008ABF Journal , 409 East Lancaster Avenue Wayne, PA 19087. All rights reserved. Reproduction in whole or in part is not permitted without written permission.

The Intangible Asset Economy, describes the environment in which

corporations operate today. Financial and economic reporting and

control systems continue to have trouble keep ing pace with this new

Intangible Asset Economy. Examples of the issues raised in our f inancial

reporting system, and in the related disclosure requirements for companies

with industrial base include the Sarbanes-Oxley Act; 482 of the IRS code;

FASB 141, 142-144; as well as the Bankruptcy Reform Act of 2005,

are relatively recent. Updated rules and regulation that

affect the intangible asset base of most companies; and

merger and acquisition accounting regulation from theyear 2000 have changed, including:

Lists and categories of intangible assets used in the

year 2000 are no longer current (See Figure 1).

Bankruptcy regulations have changed.

Values and valuation techniques for intangible assets

are different today.

The number of legal cases involving intangible assets

has doubled virtually every year in the past eight

years.

The accounting rules of today for intangibles are

different.

The definition of intangible assets, and intellectualproperty in particular, has expanded and changed

since 2000.

The definition of intangible assets and intellectual property is

constantly changing. In each of the seven areas below, the definition

of what constitutes a specific intangible asset (e.g., what is a patent or

how long does a copyright last) is being constantly expanded, both in

practice and via the law.

Trademarks: Over the last decade, the definition of trademarks has been

expanded to include entirely new areas not thought of 20 years ago,

such as digital images. In addition, today one can register a color as

a trademark. In some key European markets, a specific smell or taste

can be registered. In rare cases, a specific sound can be registered as

a trademark. There are limits, however: Harley Davidson lost its battle

to register the unique sound of the Harley Davidson motorcycle as a

trademark.

Copyrights:Copyrights have changed and expanded in terms of value

and protectability. As a result of the 2004 amendment to the Copyrigh

Act, the life of a copyright in existence prior to January 1, 1978 has

been extended to 95 years from 75 years. Assets that were soon to

be in the public domain and no longer of value to a specific owner or

estate, such as Disneys Mickey Mouse or the early drawings of Dr

Seuss, are now protected for an additional 20 years.

Patents:There has been as much change in the definition of a patent

as in any other area of intangible assets. Today, genetically modified

plants, as well as genetically engineered animals, can be registered

as patents. Also, there is a new type of patent called the Business

Method Patent, (BMP), that covers a specific business technique, such

as the Amazon one-click system of ordering. A great deal of debate sti

Into the New EconomNew Assets, Valuation Techniques,

Regulations & IssuesAs the rules and regulations for intangible assets continue to change, it is important for corporations to stay on top of

the revisions in order to update their financial and economic reporting systems. What do these changes mean for the

financing industry? CONSORs Weston Anson explains

By Weston Anson

Figure 1: A Patal Lstn of indpndnt intanbl Assts

Administrative manuals Favorable fnancing Non-compete covenants

Blueprints and drawings Favorable leases Non-diversion agreements

Chemical ormulations Franchise agreements (commercial) Open to ship customer orders

Claims (against insurers, etc.) Franchise ordinances (governmental) Ore deposits

Copyrights Goodwill-institutional Procedural manuals & related doc.

Credit inormation fles Goodwill proessional Production backlogs

Customer contracts Historical documents Quality assurance manuals

Databases HMO enrollment lists Royalty agreements

Department policy manuals Literary works Saety manuals

Distribution networks Litigation awards & damage claims Subscription lis ts

Distribution rights Loan portolios Supplier contracts

Drilling rights Marketing & promotional materials Technical documentation

Easements Mineral rights Trademarks and trade names

Equipment manuals Musical compositions Trade secrets


2/42008ABF Journal , 409 East Lancaster Avenue Wayne, PA 19087. All rights reserved. Reproduction in whole or in part is not permitted without written permission.

surrounds the concept of BMP, and in many key markets particular ly

Europe there is no recognition of the BMP as of yet.

Internet Assets: New domain names and new online assets are

constantly being created. Search devices and systems are continu-

ally being modified, upgraded and expanded. Thus, the definition of

Internet assets continues to expand.

CelebrityRights:The rights of celebrities have become more visible and

more protectable, both rights of publicity and rights of privacy. Celeb-

rity rights extend not just to living people, but, in some jurisdictions,

also to the estates of dead movie stars like John Wayne; as well as to

cartoon characters such as the Pink Panther.

Software:Software is in a constant state of reinvention and increasing

sophistication whether dealing at the platform systems stage, the

midware business applications stage or in consumer applications such

as Microsoft Word or Excel. Software can be protected via patents,

copyrights, trademarks and trade secrets.

Licenses:License agreements for intellectual property and intangible

assets are in fact assets that can be transferred and need intensely

professional management.

Bndln & Valaton of AsstsThe initial step in dealing with intangible assets is to engage in the

assembling, or bundling, of similar intangibles into logical groups. Without

the bundling concept, disorder would ensue in any complex corporate

environment in attempting to manage these assets. For example, data is

the lifeblood of many corporations. In its raw form, it is worth relatively

little. When properly assembled and bundled together with other assets

such as software, into databanks, databases and data extraction systems,

the raw data becomes part of a valuable bundle of intangibles.

Individual pieces of intellectual property rarely travel alone. A trade-

mark will typically have accompanying intangibles such as corporate

colors, logos, characters, slogans, etc. Typically, a patent will typically

have as part of its bundle trade secrets, technical know-how, processes

and processing knowledge, etc. In our view, the three most importantbundles within a corporation are its marketing bundle of assets built

around trademarks and brands; its technology bundle set on a portfolio

of patents; and its IT bundle, which encompasses its software and IT

assets and related technologies. Amongst the othe r bundles that can be

identified, several are shown in Figure 2.

The triage process of prioritizing intangible assets into a hierarchy is

a necessary step that follows the identification and bundling of assets,

and precedes the actual valuation of those assets. When time or resources

are limited, then triage is even more important as the limited time

and resources available should typically be devoted to those assets in

the group A. The referral to a triage process on grouping into A, B and

C categories, can actually result in grouping the assets into as many as

five groups (see Chapter 4 of the Intangible Assets Handbook published

by the American Bar Association 2007).

Once the bundling and triage process is complete, the actual valu-

ation of intangible assets can commence. As with most asset groups,

a handful of accepted methodologies exist and alternative valuation

methodologies are also available. In common with tangible assets, the

traditionally accepted methodologies are the cost approach, the market

approach and the income approach. In addition, there is the relief from

royalty approach, which is a variation of the income approach and is

unique to intangible assets and intellectual property. Each can be briefly

described as follows:

Cost Approach: This approach is based on the simple principle o

substitution. The underlining premise is that a potential buyer or owne

of an asset (tangible or intangible) would not pay more than it would

cost them to develop or obtain that asset or a similar asset. Subsets

of the cost approach are two dependant methodologies reproduction

cost and replacement cost. One measures the expediencies necessary

to reproduce the exact same asset; while the other measures the cos

to develop a similar or duplicate asset.

MarketApproach: As with tangible assets, the market approach is ver y

straight forward: Using examples of transactions for similar assets tha

have been sold, licensed or transferred, one arrives at a value based on

these market comparables. This approach works best when an active

market for similar intangible assets exist; remember, however, most

intangible assets are not bought and sold frequently enough to be able

to establish a value using market-based comparables.

IncomeApproach: Establishing future income streams from the use of an

asset is the core concept . In order to employ this methodology, however

three things must be known: The definitive future income stream, the

number of years left in that income stream and the appropriate discoun

rate. In this approach, the value of an intangible asset is the presen

value of the future stream of economic benefits.

Figure 2: intllctal Popty Bndls

THEBRANDBUNDLE INTERNET-RELATEDASSETS

Primary classes o registration Domain names

Secondary classes o registration Website design 1-800 numbers

Logo device Linkages

Secondary countries Retail systems

Pending applications Embedded customer base

Foreign and domestic

TECHNICALKNOW-HOW PRODUCT-RELATEDASSETS

Bench research Graphics and designs

Processes Packaging

Assembly Colors

Manuacturing databases Warranties

INTELLECTUALPROPERTY

CONTRACTS

DATA/INFORMATION-RELATED

ASSETS

In-licenses and out-licenses Databases

Co-branding agreements Mailing lists

Endorsement deals Retrieval systems

Spokesperson contracts Customer data

Venue naming rights

REALESTATE-RELATEDASSETS PEOPLE-RELATEDASSETS

Zoning, building and air rights Work-or-hire contracts

Permits Temporary help contracts

Rights o way Specialty business skills system

Easements Customer relations

Non-compete clauses

PREMIUMS CREATIVEASSETS/COPYRIGHTS

Geographical exclusive agreements Art, music and photographs

Time exclusive agreements Archives

Stand still agreements Perormance rights

First reerral clauses Reprints

MISCELLANEOUS

Gambling permits

Liquor licenses


3/42008ABF Journal , 409 East Lancaster Avenue Wayne, PA 19087. All rights reserved. Reproduction in whole or in part is not permitted without written permission.

ReliefFromRoyalty: This methodology calculates the value of an intan-

gible asset by applying a market royalty for its use, for its remaining

useful life. It measures value by estimating future revenue for the asset

from the payment of royalties. The range of royalty rates for intellectual

property however, is extraordinarily large ranging from as little as

one quarter of 1% for the use of an industrial trademark; to as much

as 20% for pharmaceutical patents, celebrity brands and well-known

trademarks such as the Olympics. A note of caution: The relief from

royalty approach has become overused, misused and abused. Too many

unsophisticated valuation experts are using this method without

sufficient knowledge of marketplace royalty rates for specific assets.

In addition to these traditional valuation methodologies, there are a

number of alternative valuation methods. Not the least of which is the

Technology Factor approach (see Intangible Assets Handbook, Chapter 4).

These alternative methodologies can be roughly divided into two types:

variations and specialized methodologies that are offshoots of the four

traditional approached described above, and semi-proprietary methodolo-

gies used by individual practitioners and firms. Some other alternative

valuation methodologies for intangible assets include:

The Brand Value Equation Method (BVEQ)

The Competitive Advantage Technique

The Concept of Relative Value

Cost Savings Method of Value

The Imputed Income Technique

The Income Differential Method of Value

Liquidation Value

Orderly Disposal Value

Premium Pricing Technique

Profit Split Method of Value

Return on Assets Employed

Rules of Thumb

Snapshots of Value Method

Subtraction Method of Value

The ValCALC Method

VALMATRIX Analysis Techniques

The alternative valuation approaches can be used when

none of the four primary methodologies can be used, or

where second analysis of value should be performed. For

example, the income differential method of value can be

used in those situations where two very similar pieces

of intellectual property are being used on a consumer

product.

For instance, one could look the income produced by

the Coca-Cola trademark (based on its sales revenue)

and compare it to the income produced by the RC Cola

trademark. On a per case basis, the income produced by

the Coca-Cola trademark is almost certainly higher than

RC Cola, and therefore this income differential becomes a

method of valuation. The income differential applied to each

sales unit of Coca-Cola, multiplied by a number of yea rs and

an appropriate discount rate, would give you the incomedifferential value. There is a small group of books on the

topic of intellectual property valuation available online.

Value Maximization

The very nature of the intangible asset class gener-

ates a number of issues revolving around uncertainty

inaccuracy and constant change. Some of the critically

important concerns are those that revolve around legal issues.

The best way to think of the legal questions surrounding intangible

assets is to group them into thre e broad areas: protection, utility and

assumability. As to protection, the issues include how broadly the

intangible assets can be protected legally, in which countries or locales

and for which kinds of products and ser vices.A thorough review of the status of legal protection for a portfolio o

intellectual property assets, including patents, trademarks, copyrights

software and trade secrets, is imperative. This should be the f irst step in

any analysis or plan to maximize value from intangibles. Tactical busi-

ness issues can be even more critical. Some tactical issues follow:

One must consider the competitive assets available in the marketplace

In other words, if one has a database of retail names available for sale

or rent, it is important to know what similar competitive databases

are available.

The question of comparable asset values is always an issue with intan

gible assets. In dealing with trademarks, the question becomes wha

are similar trademarks worth, and/or what would it cost to license a

similar trademark.

What is the value of existing licenses and licensee relationships, and

can they be expanded/transferred or otherwise leveraged?

What are the maintenance issues with the intangible assets? Main

taining patent and trademark registrations in multiple classes of goods

in multiple countries is expensive and can be tricky.

Quality and other control issues revolving around the intangibles

are important, including ongoing monitoring of product, review of

marketing, collection of royalties, etc.

Managing the timeline for a portfolio of intangible assets is often an

issue, particularly if there are multiple assets in multiple geographies

Nw Books on intllctal Popty

In 2005, the ABA book publishing group embarked on an ambitious program

of publishing at least six new books on intellectual property. The goal being

to invigorate discussion and an understanding of all forms of IP. Thus far, four

books in the series have been published:

The irst, Intellectual Property Valuation published in 2005, was written and edited

by Weston Anson, with the able support o a diverse group o contributors;

The second book, The Intangible Asset Handbook aims speciically at the business

lawyer, and in particular lawyers and bankers involved in corporate reorganizations. It

is a handy desk reerence covering virtually every type o intangible asset.

The third in the series, Valuation, Damages, and Expert Witnesses, written by Anson,

will become one o the deinitive reerence books on the topic o IP litigation, and the

use o expert witnesses in damage cases and or other IP issues. The publication date

is May 2008.

The ourth book, was sent in inal manuscript to the ABAs co-publisher in China,

The Intellectual Property Publishing Company o China. It is a revised version o

Intellectual Property Valuation, with added materials particularly relevant to China.

The title is Intellectual Property and Brand Values in China, to be published in

autumn 2008.

All o these add to both the legal and commercial knowledge o intellectual property

and intangible assets. Brian Kay, the head o the ABA book publishing organization

said, It is our view that intellectual property will remain at the oreront o discus-

sion, not only in our economy, but in industrialized and emerging nations like China.


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SINglE USE ONly

2008ABF Journal , 409 East Lancaster Avenue Wayne, PA 19087. All rights reserved. Reproduction in whole or in part is not permitted without written permission.

Finally, how does one best pull together these concepts of asset

identification, categorization, bundling, valuation and value traction?

These five simple ideas can be very helpful whenever value needs to be

extracted for business, financial or legal reasons:

Identify where maximum realizable value is to be found in the intangible

asset portfolio,

Establish a realistic market value for the assets,

Understand the alternative ways that value can be extracted from the

assets,

Select the best intangible asset strategy for that current situation,

Manage the process. abfJ

Wston Anson is chairman of CONSOR, an intellectual asset consulting

firm specializing in trademark, technology, and copyright licensing, valuation

and expert testimony. The firm, headquartered in La Jolla, CA, with offices

in New York and London, concentrates on two primary areas: developing

effective leverage and licensing strategies for IP portfolios; and establishing

specific market values for trademarks, patents, brands and other intangible

assets. Anson served for six years as vice president of the Licensing Industry

Merchandisers Association and is a lifetime member of the board of advisors

He is a past co-chair of the ABA Trademark Licensing Subcommittee, and is

the current appointed chair of the Asset Sales Committee for the American

Bankruptcy Institute. An active member of the Licensing Executives Society

he is a past chairman of the Valuation Committee, the Internet LicensingE-Commerce Committee and the Trademark Licensing Committee. He is

currently on the International Board of LES. He is active in the INTA

the ASA and the Euro-American Tax Institute. In addition, Anson is an

international IP arbitrator with National Arbitration & Mediation, and is a

WIPO approved arbitrator. He has authored two books, and has two more

that will be published in 2008. Anson can be contacted at 858-454-9091

or by e-mail at [email protected].

and/or with multiple end-users. Managing the renewal process for

licenses and licensees, and/or approving new products, geographies

or new uses is often time-critical.

Managing complex licensee relationships and agreements can be a

major tactical issue.

In-place management also can be an issue, leading to decisions on

whether to import or supplement management, or to outsource the

management of the intangible assets, or simply to sell the assets

because management issues are either too great or the management

team too thin.

Tactcal isss

There are a number o alternative value extraction strategies that can be used.

However, too oten in our view, a companys legal and/or management team

will treat intangible assets very simplistically simply grouping the intangible

and tangible assets into one amorphous bunch. Moreover, many times they

are simply ignored in an acquisition, reorganization, bankruptcy or other trans-

action. There are multiple value maximization alternatives, including:

Sale of all the intangible assets/intellectual property as a group to a

single purchaser.

Sale of some bundles of the intangible assets/intellectual property,

while keeping other bundles for the company.

Sale of most of the intangibles, and selecting productive assets to keep

and to manage for cash flow.

Collateralize the assets with an institutional lender.

Extend, expand and leverage the assets via licensing, joint ventures,

etc. to increase cash flow.

Make changes in the licensees, franchisees and users of the intangible

assets.

Reconfigure the company by selling all the tangible assets and keeping

the intangible assets to license, thus creating an intellectual proper ty

holding company (IPHC).

Monetize the assets by securitizing them for the benefit

of a lender. Recover lump-sum payments (fully paid-up license agreements) that

may have been advanced by the company to other intellectual property

owners, for use of certain intangible assets.

Accelerate royalty payments due from licensees, franchisees and

other users.

While easy enough to list, the question becomes, how does one

implement any of these strategies? Some can be difficult, expensive

and time consuming, while others can be quickly executed. The three

key resources for success are time, money and management skills. The

questions are as follows: Does one have the luxury of time to develop an

alternative strategy, are there funds available to finance that strategy, and

are management skills in place or obtainable to enable execution?

In addition to existing management, there are a number of alterna-

tives for managing value extraction. The f irst is to bring in management

teams specializing in IP and intangible asset management. The second

is to turn to a specialty firm of intellectual property lawyers who, if they

are intimately involved with the companys intangible asset portfolio, can

be of great help in value maximization.

Many attorneys have an understanding of the business issues (but

far from all do). The third approach is to turn to licensing consultants

who specialize in extracting value by licensing out various types of intel-

lectual property for royalty payments. These IP specialists tend to be very

effective where a decision has already been made to increase value via

licensing, sale or othe r strategy.

Oanzatons Spcalzn n iP

The following organizations specialize in intellectual property and have

an influence over regulation, use, registration, litigation, manage-

ment, etc:

The International Trademark Associa tion (INTA) www.inta.org

The international Licensing Executive Society (LESI) www.lesi.org

The American Intellectual Property Law Association (AIPLA) www.aipla.org

The Association Internationale pour la Protection de la Propriete Intel-

lectuelle (AIPPI) www.aippi.org

The World Intellectual Property Organization (WIPO) www.wipo.org

The Licensing Industry Merchandisers Association (LIMA)

www.licensing.org

The American Bar Association (ABA) and its sections and committees

on intellectual property www.abanet.org

The Intellectual Property Owners group (IPO) www.ipo.org

The Association of Corporate Patent Counsel www.jurisdiction.com

American Bankruptcy Institute (ABI) www.abiworld.org

Documents

Into the New Economy: New Assets, Valuation Techniques, Regulations & Issues