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year 2000 are no longer current (See Figure 1).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