Valuatio on of Intell ectual Pro by Phili

4971
1 Carpinteria Ave
e., Unit D Carrpinteria, CA 930
013‐1877 P
Phone: +1‐805‐4
405‐3947 [email protected]
@totaro‐associa
ates.com Valuatio
on of Intellectual Pro
operty Asse
ets
How to Maximize
M
your
y
Sale Price (or Min
nimize yourr Acquisition
n Cost)
by Philip Totaro, Principal,
P
Totaro
T
& Associates
A
In recent years intellectual capital, in
n all its fo
orms, has become of tremendous
nce in the business
b
world.
w
Proac
ctive comp
panies and inventors h
have known
n this
importan
for years
s, but the le
everage tha
at a patent, trademarkk, trade seccret or otherr know-how
w can
provide has certain
nly increase
ed. The nu
umber of pa
atent appliccations and
d issued pattents
has skyrrocketed in the past 15
5 years, tra
ademark fili ngs are alsso up and th
he rate at w
which
intellectu
ual properrty (IP) as
ssets are being assserted, lice
ensed and even solld is
astonish
hing.
Markets have been
n created for
f trading / sales of p
patents and
d most of u
us are awa
are of
the business mode
els of aggre
egators, non
n-practicing
g entities an
nd “trolls” o
out there. B
But if
you are in the marrket to buy or sell IP assets
a
how do you know how mu
uch to ask for if
you’re a seller or where
w
to sett your limit if you’re a b
buyer?
One of the
t best wa
ays to sell is to put yo
ourself into
o the mindsset of the b
buyer. How
w will
they make their dec
cision to ac
cquire an IP
P asset?
The pro
ocess of divesting
d
IP
P assets occurs in three pha
ases. Firsst is a ma
arket
assessm
ment and va
aluation of the intellec
ctual capita
al, second is target id
dentification
n and
sales terms negotiation, and last is the sales agre ement draffting, deal cclosure and
d the
transfer of assets.
1)
Market
M
Asse
essment an
nd Valuation
n
e a valuatio
on of IP as
ssets there
e are severral methodss which ca
an be
In orderr to provide
employe
ed. We hav
ve taken so
ome time to list and evvaluate the benefits an
nd drawbaccks of
each one. Certain methods have
h
been employed
e
w
which I liken
n to “shortccuts” since tthere
es when larg
ge numbers
s of patents
s or tradem
marks are be
eing evalua
ated all at o
once.
are time
I believe
e the best method
m
invo
olves good old fashion
ned hard wo
ork and ana
alysis.
storical” me
ethod is a simplistic model
m
whicch takes intto account all direct ccosts
The “his
incurred
d to date for technolog
gy developm
ment and IP
P protectio
on and attem
mpts to reccover
these co
osts plus an
n additionall componen
nt for inflatio
on compen
nsation. Wh
hile this me
ethod
can imp
prove consistency with
h historical patent sale
es price tre
ends, the d
drawback to
o the
inventorr/creator is that there is
i no correllation betwe
een the exxpenditure o
on the pate
ent or
tradema
ark protectio
on or the revenue ge
enerating p
potential off the eventual comme
ercial
product or service and
a subject IP.
The “ma
arket” appro
oach attem
mpts to benchmark the
e sale price
e of IP asssets againsst the
scope and
a
maturity
y of your own.
o
Some
e have like
ened this to
o home-buyying where
e you
search for
f “comps”” in a neighborhood yo
ou are look ing to buy tto help ben
nchmark wh
hat is
a reasonable price
e to pay fo
or your ow
wn home. In our casse, significa
ant researcch is
©2011
1 Totaro & Associates All R
Rights Reservved 4971
1 Carpinteria Ave
e., Unit D Carrpinteria, CA 930
013‐1877 P
Phone: +1‐805‐4
405‐3947 [email protected]
@totaro‐associa
ates.com required
d to determine comparrable states
s of techno
ological matturity as we
ell as the scope
of IP pro
otection. The drawbac
ck is that prrices paid ffor sales of IP assets a
are rarely m
made
public, so
s benchma
arking is no
ot always easy.
e
To g
go back to tthe home-b
buying analogy,
the house may look the sam
me on the outside, b
but the con
ndition of tthe interior and
foundation will mak
ke all the diffference. Real
R
asset vvalue need
ds to be like
e for like.
An analytical mode
el utilizing analysis
a
an
nd classificcation of cittations is a newer me
ethod
resulting
g from robu
ust tools wh
hich were originally de
eveloped for patent lan
ndscaping. The
thought is that the more forw
ward citation
ns your pattent has th
he more valuable it sh
hould
be, since
e it is likely
y to be cons
sidered a seminal worrk in your in
ndustry. Th
he problem with
this is that
t
there are
a many reasons a patent is cited as p
prior art, an
nd unless each
forward citation is analyzed
a
on
ne cannot determine
d
t he true worrth of the pa
atent at han
nd. I
a
to
ools have a great plac
ce in the IP landscapin
ng space, b
but they win
nd up
believe analytical
being a poor meth
hod for dete
ermining an
n appropria
ate valuatio
on. This ap
pproach alsso is
nt for trademarks sinc
ce it is not possible to
o use citatio
ons in the evaluation of a
irrelevan
brand an
nd the mark
ks/logos wh
hich go alon
ng with it.
Thereforre, I would propose th
he method which is re
eferred to a
as the “inco
ome” appro
oach.
This invo
olves quantifying a ca
ash-flow forecast base
ed on future
e income sttreams of th
he IP
asset’s commercia
al use. This approach
h will necesssitate the need for m
market rese
earch
and ana
alysis on pro
ojected sale
es and marrket share, volume pro
oduction prricing as we
ell as
standard
d profit marrk-up, which
h must all be
b placed in
nto a cost m
model.
The reason this me
ethod work
ks the best is that savvvy potentia
al buyers and corpora
ations
ct a simila
ar model and
a
look a
at the net present vvalue (NPV
V) of
will likely construc
commerrcializing th
he IP. One
e compone
ent of theirr purchase analysis iss to investigate
whetherr the acquiisition costt of the IP assets m
makes their NPV calcculation zerro or
negative
e. If that is the case, then they arre unlikely tto agree to the purcha
ase.
But, justt because you can fig
gure out a positive N PV doesn’tt mean you
u’re home free.
The bes
st approach is to selec
ct a limit for the valuatiion price wh
hich will no
ot force the NPV
calculatiion to resu
ult in an internal rate of return (IRR) whicch falls below the buyer’s
threshold for overa
all internal project
p
approval. For most comp
panies this IRR is typiically
on the order
o
of 20 – 25%. Starting
S
with
h a valuatio
on price wh
hich resultss in a 12 - 15%
IRR and
d working do
own the price scale fro
om there iss highly sug
ggested.
While th
his method requires ad
dequate ma
arket know ledge and cost predicction capab
bility I
believe that for mo
ost industrie
es there is sufficient m
market rese
earch for a very educcated
guess att worst.
2)
Target
T
Identtification an
nd Negotiatiion of Saless Terms
This pha
ase should be fairly se
elf-explanattory, but it iinvolves ide
entifying intterested bu
uyers
and atte
empting to determine
d
their
t
valuattion method
ds and IRR
R threshold,, so that a price
can be set
s which is
s equitable to both parrties.
©2011
1 Totaro & Associates All R
Rights Reservved 4971
1 Carpinteria Ave
e., Unit D Carrpinteria, CA 930
013‐1877 P
Phone: +1‐805‐4
405‐3947 [email protected]
@totaro‐associa
ates.com Potentia
al buyers may
m
be tho
ose who you
y
can in
nfer are inffringing on
n the paten
nt or
tradema
ark or even a company
y who is loo
oking to gett into the lin
ne of business for the type
of IP as
ssets you possess.
p
Doing
D
some
e homeworrk can usu
ually turn up a reason
nably
compreh
hensive lis
st, but look
king at the
e marketpllaces for IIP asset ssale is ano
other
approac
ch. Beware
e that some
e of these charge
c
feess to list and may also ccharge a fe
ee for
the sale.
olvement off a law firm
m representa
ative who h
has experie
ence in IP a
asset sales may
The invo
be nece
essary at th
his stage, but it will definitely
d
b
be required
d for the sa
ales agreem
ment
drafting and review
w, which occ
curs next.
3)
Sales
S
Agree
ement Draftting and Tra
ansfer of Asssets
This ste
ep should be
b self-expllanatory as
s well. Once a buyerr has been
n identified then
negotiattion of term
ms will take place. Gra
ant back liccenses (if d
desired), tra
ansfer of title as
well as payment
p
terms should
d all be a pa
art of the disscussion.
Templatte agreeme
ents exist fo
or this type of transacttion, but ha
aving a lega
al expert re
eview
and app
prove draft and final language of such an
n agreeme
ent is stron
ngly suggested.
Upon ex
xecution of the agreem
ment the tra
ansfer of assets will takke place in a manner llikely
to have been negotiated and should
s
be outlined
o
in tthe agreem
ment.
Conside
ering Work
king with a Law Firm or Brokerr?
ers are inclin
ned to involve a law firrm or a bro
oker who sp
pecializes in
n this
Most IP asset selle
t
n to act on their behallf. Understtand that a broker / m
market makker is
type of transaction
likely to ask for 20
0 – 30% of the take frrom the assset sale, b
but law firm
ms might assk for
even mo
ore, betwee
en 35 – 50
0%. The in
nvolvement of a legal profession
nal is not on
nly a
good ide
ea, but might be required since someone
s
w
with very goo
od knowled
dge of contracts
and tran
nsfer of own
nership is essential
e
to this effort. However, a few cave
eats exist to
o this
type of arrangemen
a
nt:
1) Iff you do wo
ork with eith
her a brokerr or lawyer it would be
e highly reco
ommended
d that
th
he partner selected
s
for this type of
o effort is w
willing to acccept deferrred payme
ent of
services ren
ndered until after the asset sale
e is completed. How
wever, som
me of
hem do ask
k for a retainer up fron
nt and som
me may askk to be com
mpensated even
th
in
n the event that the as
sset sale is not comple
eted.
2) Additionally,
A
it is recom
mmended that for the involveme
ent of a leg
gal professional,
you make pa
ayment to the
t lawyer / firm on a pre-negotia
ated flat fee
e basis or o
on an
o
those specific se
ervices rend
dered in re
egards to ssales
hourly rate basis for only
agreement drafting
d
and
d review. Otherwise, the law firrm may be inclined to
o ask
fo
or a large percentage
p
of the asset sale as payment fo
or their serrvices rende
ered,
and it is my belief that they would
d be asking
g for more than the va
alue they w
would
add to this effort
e
given their limited
d involveme
ent.
©2011
1 Totaro & Associates All R
Rights Reservved 4971
1 Carpinteria Ave
e., Unit D Carrpinteria, CA 930
013‐1877 P
Phone: +1‐805‐4
405‐3947 [email protected]
@totaro‐associa
ates.com If you want
w
a lawy
yer handling
g the negotiation for yyou, then it might be ok to settle for
their term
ms, but you
u don’t have
e to give aw
way half you
ur gains if yyou don’t w
want to.
Don’t Have a Trad
demark or Patent Yett?
Whetherr you’re an individual entreprene
eur / invento
or or a larg
ge corporation you will find
it pays to
t have trad
demarks re
egistered an
nd patents issued, or at least ap
pplications filed.
Ideas arre intangible
e assets which cannot be easily valued. Pa
atents and trademarkss are
a form of
o tangible asset
a
that has
h certain capital costt associated with prossecution and
d the
business
s value the IP creates
s. The more
e you have
e to offer a b
buyer in tan
ngible IP asssets
the more
e it will increase your valuation.
v
Simple
S
as tthat.
Also, so
ome advice for those in
ndividuals out
o there w
who “have a great idea
a that they want
to sell to
o a compan
ny.” This is a great dre
eam to havve, but the m
more home
ework and e
effort
you put into presenting a pottential buye
er with com
mprehensive analysis the more llikely
you will be to see success. If you’ve tried to ap
pproach com
mpanies be
efore and have
been turrned away, think about your sales
s method.
You can
n cash in on your great ideas if you havve the righ
ht tools at your disp
posal.
Knowing
g what you’re getting yourself
y
into
o will prepa
are you vs. being shoccked and fe
eeling
taken ad
dvantage off later.
About the Author
s the Princ
cipal at Tota
aro & Asso
ociates, a cconsulting ffirm focuse
ed on
Mr. Philip Totaro is
on strategy
y, competitive intellige
ence, produ
uct develop
pment and patent sea
arch.
innovatio
Mr. Tota
aro has ex
xperience in
i strategic
c planning as well ass creating and protecting
intellectu
ual capital. He has worked forr such com
mpanies ass General Electric, United
Technologies Corp
poration an
nd most re
ecently he
e oversaw Intellectual Property and
Competitive Asses
ssment for Clipper Windpowe
er. He has helped
d cultivate and
dispositiion over 450
4
innovattions, and his asses sment hass led to ovver 250 issued
patents. His strate
egic market analysis has led to th
he funding jjustification
n of over $5
500M
in R&D investmen
nt and the developme
ent of multi-million dollar produ
uct and service
offerings
s. He has
s provided legal and technical d
due-diligence for ove
er $1B in M
M&A,
including
g the rec
cent takeo
over of Clipper
C
Windpower by United Technolo
ogies
Corpora
ation. To fin
nd out more
e or get in to
ouch pleasse visit www
w.totaro-asssociates.com.
©2011
1 Totaro & Associates All R
Rights Reservved