Catherine Tremblay, CA, CBV, ASA
Catherine Tremblay, CA, CBV, ASA
WISE, BLACKMAN
WISE, BLACKMAN LLP
LLP
Canada
Canada
[email protected]
[email protected]
INTELLECTUAL PROPERTY
INTELLECTUAL PROPERTY
VALUATIONS
VALUATIONS
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
McMillan Binch – May 13, 2008
1
Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
AGENDA
AGENDA
•
•
Intangible asset categories
Intangible asset categories
•
•
When is a valuation required?
When is a valuation required?
•
•
Components of
Components of
“
“
fair market value
fair market value
”
”
•
•
“
“
Fair value
Fair value
”
”
for financial reporting
for financial reporting
•
•
Valuation approaches (market, income, cost)
Valuation approaches (market, income, cost)
FAIR VALUE FOR FINANCIAL REPORTING
FAIR VALUE FOR FINANCIAL REPORTING
CATEGORIES OF INTANGIBLE ASSETS
CATEGORIES OF INTANGIBLE ASSETS
A34
A34
–
–
A38
A38
A31
A31
–
–
A33
A33
A29
A29
–
–
A30
A30
A23
A23
–
–
A28
A28
A20
A20
–
–
A22
A22
Canada
Canada
CICA 1581
CICA 1581
A25
A25
–
–
A28
A28
Technology
Technology
-
-
based
based
U.S.A.
U.S.A.
SFAS 141
SFAS 141
A23
A23
–
–
A24
A24
Contract
Contract
-
-
based
based
A22
A22
Artistic
Artistic
-
-
related
related
A18
A18
–
–
A21
A21
Customer
Customer
-
-
related
related
A15
A15
–
–
A17
A17
Marketing
Marketing
-
-
related
related
Appendix Section References
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
McMillan Binch – May 13, 2008
3
Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
INTANGIBLE ASSET CATEGORIES
INTANGIBLE ASSET CATEGORIES
1.
1.
Marketing
Marketing
-
-
related, including:
related, including:
•
•
Trademarks, trade names, brands, logos
Trademarks, trade names, brands, logos
•
•
Foreign trademark rights
Foreign trademark rights
•
•
Service marks, collective marks, certification marks
Service marks, collective marks, certification marks
•
•
Product distribution channels
Product distribution channels
•
•
Delivery systems
Delivery systems
•
•
Internet domain names
Internet domain names
•
•
Trade dress (unique colour, shape or package design)
Trade dress (unique colour, shape or package design)
•
•
Non
Non
-
-
competition agreements
competition agreements
INTANGIBLE ASSET CATEGORIES
INTANGIBLE ASSET CATEGORIES
(cont
(cont
’
’
d)
d)
2.
2.
Customer
Customer
-
-
related
related
—
—
customer
customer
structure of the business, including:
structure of the business, including:
•
•
Customer lists
Customer lists
•
•
Order backlog
Order backlog
•
•
Customer contracts and the related customer
Customer contracts and the related customer
relationships
relationships
•
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
McMillan Binch – May 13, 2008
5
Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
INTANGIBLE ASSET CATEGORIES
INTANGIBLE ASSET CATEGORIES
(cont
(cont
’
’
d)
d)
3.
3.
Artistic-
Artistic
-related
related —
—
artistic works (to which
artistic works (to which
the business has title), including:
the business has title), including:
•
•
Books, magazines
Books, magazines
•
•
Musical works, including advertising jingles
Musical works, including advertising jingles
•
•
Literary
Literary
•
•
Video and audiovisual material, motion pictures,
Video and audiovisual material, motion pictures,
music videos
music videos
•
•
Pictures, photographs
Pictures, photographs
INTANGIBLE ASSET CATEGORIES
INTANGIBLE ASSET CATEGORIES
(cont
(cont
’
’
d)
d)
4.
4.
Contract
Contract
-
-
based
based
—
—
with fixed or definite term,
with fixed or definite term,
including:
including:
•
•
Licenses
Licenses
•
•
Facility leases and others
Facility leases and others
•
•
Franchise agreements
Franchise agreements
•
•
Permits
Permits
•
•
Royalties
Royalties
•
•
Advertising, construction, management and service or supply
Advertising, construction, management and service or supply
contracts
contracts
•
•
Employment contracts/collective agreements
Employment contracts/collective agreements
•
•
Financing agreements
Financing agreements
•
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
McMillan Binch – May 13, 2008
7
Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
INTANGIBLE ASSET CATEGORIES
INTANGIBLE ASSET CATEGORIES
(cont
(cont
’
’
d)
d)
5.
5.
Technology based
Technology based
—
—
relate to innovations or
relate to innovations or
technological advances within the business,
technological advances within the business,
including:
including:
•
•
Patents
Patents
•
•
Non
Non
-
-
patented technology
patented technology
•
•
Computer software (operational software) and licenses
Computer software (operational software) and licenses
•
•
Databases
Databases
•
•
Technical drawings
Technical drawings
•
•
Research and development
Research and development
•
•
Trade secrets
Trade secrets
•
•
Know
Know
-
-
how
how
WHEN ARE THEY REQUIRED?
WHEN ARE THEY REQUIRED?
•
•
Transaction support
Transaction support
•
•
Bankruptcy
Bankruptcy
•
•
License fees & royalties
License fees & royalties
•
•
Strategic alliances
Strategic alliances
•
•
Income taxation
Income taxation
•
•
Marital dissolution
Marital dissolution
•
•
Infringement damages
Infringement damages
•
•
Inter
Inter
-
-
company transactions
company transactions
& transfer pricing
& transfer pricing
•
•
Collateral
Collateral
-
-
based financing
based financing
•
•
Accounting requirements
Accounting requirements
•
•
Regulatory requirements
Regulatory requirements
•
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
McMillan Binch – May 13, 2008
9
Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
COMPONENTS OF THE
COMPONENTS OF THE
FAIR MARKET VALUE OF A BUSINESS
FAIR MARKET VALUE OF A BUSINESS
COMPOSITION OF A BUSINESS
COMPOSITION OF A BUSINESS
ENTERPRISE
ENTERPRISE
Intellectual Property
Intangible Assets
Other Tangible Assets
Working Capital
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
McMillan Binch – May 13, 2008
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Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
THE BUSINESS ENTERPRISE EQUATION
THE BUSINESS ENTERPRISE EQUATION
VALUE
VALUE
OF
OF
BUSINESS
BUSINESS
ENTERPRISE
ENTERPRISE
VALUE OF NET
VALUE OF NET
MONETARY
MONETARY
ASSETS
ASSETS
VALUE OF
VALUE OF
TANGIBLE
TANGIBLE
ASSETS
ASSETS
VALUE OF
VALUE OF
INTANGIBLE
INTANGIBLE
ASSETS
ASSETS
VALUE
VALUE
OF
OF
EQUITY
EQUITY
VALUE
VALUE
OF
OF
LONG
LONG
-
-
TERM
TERM
DEBT
DEBT
=
=
Value of
Value of
Underlying Assets
Underlying Assets
Value of
Value of
Invested Capital
Invested Capital
=
=
+
+
+
+
+
+
GENERAL ALLOCATION FORMULA
GENERAL ALLOCATION FORMULA
Intellectual Property
Intellectual Property
+
+
Goodwill
Goodwill
+
+
Other Identifiable
Other Identifiable
Intangible Assets
Intangible Assets
+
+
Fixed Assets
Fixed Assets
+
+
Monetary and
Monetary and
Current Assets
Current Assets
Shareholders
Shareholders
’
’
Equity
Equity
+
+
Long
Long
-
-
Term Debt
Term Debt
+
+
Current Liabilities
Current Liabilities
=
=
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
McMillan Binch – May 13, 2008
13
Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
EXAMPLE
EXAMPLE
CONSTITUENT ELEMENTS OF A TRADE MARK
CONSTITUENT ELEMENTS OF A TRADE MARK
•
•
Trademark
Trademark
TM, MD
TM, MD
•
•
“
“
Sub
Sub
-
-
brands
brands
”
”
•
•
Marketing strategy
Marketing strategy
•
•
Logo
Logo
•
•
Website
Website
•
•
Colours
Colours
•
•
International public
International public
relations
relations
•
•
Label designs
Label designs
•
•
Etc.
Etc.
TRADEMARKS
TRADEMARKS
vs
vs
OTHER ASSETS
OTHER ASSETS
•
•
Recipes
Recipes
•
•
Processes
Processes
•
•
“
“
Sub
Sub
-
-
brands
brands
”
”
(Classic Coke, Diet Coke,
(Classic Coke, Diet Coke,
Cherry Coke, Zero, etc.)
Cherry Coke, Zero, etc.)
Coca
Coca
-
-
Cola trademark combines following
Cola trademark combines following
elements:
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
McMillan Binch – May 13, 2008
15
Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
EXAMPLES OF TRADEMARKS
EXAMPLES OF TRADEMARKS
Commercial presentation
Commercial presentation
(colour, form, Unique
(colour, form, Unique
packaging concept)
packaging concept)
TM
TM
Registered or not
Registered or not
“
“
Swoosh
Swoosh
”
”
Logo
Logo
Excellence
Excellence
Branding
Branding
Association with Tiger Woods
Association with Tiger Woods
Image
Image
Nike
Nike
Commercial name
Commercial name
NINE HIGHEST VALUED TRADEMARKS
NINE HIGHEST VALUED TRADEMARKS
–
–
2007
2007
($ BILLIONS
($ BILLIONS
—
—
SOURCE : INTERBRAND
SOURCE : INTERBRAND
)
)
16.0
16.0
155.6
155.6
0.6
0.6
33.7
33.7
Nokia
Nokia
5
5
100.0
100.0
202.0
202.0
0.0
0.0
32.1
32.1
Toyota
Toyota
6
6
36.8
36.8
158.0
158.0
1.0
1.0
31.0
31.0
Intel
Intel
7
7
15.5
15.5
71.1
71.1
0.0
0.0
29.4
29.4
McDonald
McDonald
’
’
s
s
8
8
31.8
31.8
65.7
65.7
8.1
8.1
29.2
29.2
Disney
Disney
9
9
Book Value of
Book Value of
Intangible
Intangible
Assets
Assets
(Balance
(Balance
Sheet)
Sheet)
Book Value of
Book Value of
Shareholders
Shareholders
’
’
Equity
Equity
(Balance
(Balance
Sheet)
Sheet)
Market
Market
Capitalization
Capitalization
Estimated
Estimated
Value of
Value of
Trademark
Trademark
Trademark
Trademark
Rank
Rank
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
McMillan Binch – May 13, 2008
17
Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
NINE HIGHEST VALUED TRADEMARKS
NINE HIGHEST VALUED TRADEMARKS
–
–
2007
2007
($ BILLIONS
($ BILLIONS
—
—
SOURCE: INTERBRAND
SOURCE: INTERBRAND
)
)
(
(
cont
cont
’
’
d
d
)
)
31.1
31.1
337.0
337.0
0.9
0.9
58.7
58.7
Microsoft
Microsoft
2
2
28.5
28.5
154.1
154.1
2.2
2.2
57.1
57.1
IBM
IBM
3
3
112.3
112.3
410.9
410.9
13.1
13.1
51.6
51.6
GE
GE
4
4
3.7
3.7
Book Value
Book Value
of Intangible
of Intangible
Assets
Assets
(Balance
(Balance
Sheet)
Sheet)
16.9
16.9
139.8
139.8
65.3
65.3
Coca
Coca
-
-
Cola
Cola
1
1
Book Value of
Book Value of
Shareholders
Shareholders
’
’
Equity
Equity
(Balance
(Balance
Sheet)
Sheet)
Market
Market
Capitalization
Capitalization
Estimated
Estimated
Value of
Value of
Trademark
Trademark
Trademark
Trademark
Rank
Rank
VALUATION APPROACHES
VALUATION APPROACHES
Income
Income
Market
Market
Cost
Cost
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Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
COST APPROACH
COST APPROACH
•
•
Replacement/reproduction cost
Replacement/reproduction cost
•
•
Cumulative historical costs
Cumulative historical costs
–
–
Professional fees
Professional fees
–
–
Registration fees
Registration fees
–
–
Design fees
Design fees
–
–
Marketing and promotion fees
Marketing and promotion fees
•
•
Indexed to inflation
Indexed to inflation
MARKET APPROACH
MARKET APPROACH
•
•
Reference to actual comparable market
Reference to actual comparable market
transactions (guideline companies or
transactions (guideline companies or
comparable IP)
comparable IP)
•
•
Compare characteristics of IP and adjust if
Compare characteristics of IP and adjust if
necessary
necessary
•
•
Relief
Relief
-
-
from
from
-
-
Royalty Method
Royalty Method
•
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
McMillan Binch – May 13, 2008
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Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
RELIEF
RELIEF
-
-
FROM
FROM
-
-
ROYALTY METHOD
ROYALTY METHOD
•
•
Multiply future projected revenues by
Multiply future projected revenues by
royalty rate
royalty rate
•
•
Discount cash flows using appropriate
Discount cash flows using appropriate
rate of return reflecting risk
rate of return reflecting risk
REASONABLE ROYALTY
REASONABLE ROYALTY
•
•
Established royalty
Established royalty
•
•
Notionally (hypothetically) negotiated royalty
Notionally (hypothetically) negotiated royalty
•
•
Adopting analytical approach (which
Adopting analytical approach (which
determines reasonable royalty as excess of
determines reasonable royalty as excess of
anticipated profits over normalized level of
anticipated profits over normalized level of
industry profit margin)
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
McMillan Binch – May 13, 2008
23
Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
RELIEF
RELIEF
-
-
FROM
FROM
-
-
ROYALTY METHOD
ROYALTY METHOD
Five inputs used in applying method:
Five inputs used in applying method:
1.
1.
Remaining life of IP
Remaining life of IP
2.
2.
Forecast revenues
Forecast revenues
3.
3.
Royalty rate
Royalty rate
4.
4.
Tax rate
Tax rate
5.
5.
Discount rate
Discount rate
RELIEF
RELIEF
-
-
FROM
FROM
-
-
ROYALTY METHOD
ROYALTY METHOD
$1,285
$1,285
$1,264
$1,264
$1,354
$1,354
$1,452
$1,452
$1,556
$1,556
Present value
Present value
0.555
0.555
0.624
0.624
0.702
0.702
0.790
0.790
0.889
0.889
Present value (discount)
Present value (discount)
factor
factor
2,316
2,316
2,026
2,026
1,929
1,929
1,838
1,838
1,750
1,750
After
After
-
-
tax income
tax income
--
993
993
--
868
868
--
827
827
--
787
787
--
750
750
Less: Income taxes
Less: Income taxes
—
—
say 30%
say 30%
3,309
3,309
2,894
2,894
2,756
2,756
2,625
2,625
2,500
2,500
Avoided royalties
Avoided royalties
5%
5%
5%
5%
5%
5%
5%
5%
5%
5%
Fair market royalty rate
Fair market royalty rate
—
—
say
say
$60,775
$60,775
$57,881
$57,881
$55,125
$55,125
$52,500
$52,500
$50,000
$50,000
Projected sales of product
Projected sales of product
Year 5
Year 5
Year 4
Year 4
Year 3
Year 3
Year 2
Year 2
Year 1
Year 1
VALUE OF INTANGIBLE ASSET:
VALUE OF INTANGIBLE ASSET:
= TOTAL OF PRESENT VALUES = $6,911
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
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Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
CASH FLOW METHOD
CASH FLOW METHOD
•
•
Higher sales price
Higher sales price
•
•
Additional volume
Additional volume
•
•
Economies of scale (production)
Economies of scale (production)
•
•
Reduction in costs (administration,
Reduction in costs (administration,
advertising and promotion)
advertising and promotion)
INCOME/CASH FLOW APPROACH
INCOME/CASH FLOW APPROACH
•
•
Discounting of cash flows
Discounting of cash flows
•
•
Profit sharing (Rule
Profit sharing (Rule
-
-
of
of
-
-
thumb: 25%
thumb: 25%
-
-
75%)
75%)
–
–
25% of profits to owner of trade name
25% of profits to owner of trade name
–
–
75% to user of trade name (higher risk level)
75% to user of trade name (higher risk level)
–
–
Depending on characteristics of IP, industry
Depending on characteristics of IP, industry
sector, profitability, etc.
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Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
DISCOUNTING OF CASH FLOWS
DISCOUNTING OF CASH FLOWS
•
•
Projection of future benefits:
Projection of future benefits:
–
–
Revenues
Revenues
–
–
Cost of sales
Cost of sales
–
–
Sales and administration costs
Sales and administration costs
–
–
Taxes
Taxes
–
–
Contributory asset charge (working capital, capital
Contributory asset charge (working capital, capital
assets, other intangible assets)
assets, other intangible assets)
•
•
Discount using rate that reflects level of risk
Discount using rate that reflects level of risk
DEVELOPMENT OF DISCOUNT RATE
DEVELOPMENT OF DISCOUNT RATE
BUILD
BUILD
-
-
UP METHOD
UP METHOD
Risk
Risk
-
-
Free Rate
Free Rate
Equity Risk Premium
Equity Risk Premium
Impact of “Size” on
Risk
Other Company Risk
(Internal & External)
4.2
4.2
3.4
3.4
8.7
8.7
2.3
2.3
TOTAL
TOTAL
DISCOUNT RATE
DISCOUNT RATE
19.6%
19.6%
Market
Market
Rate of
Rate of
Return
Return
Company
Company-
-Specific
Specific
Risk
Risk
Factors
Factors
Other Company Risk
Other Company Risk
(Internal & External)
(Internal & External)
Impact of
Impact of
“
“
Size
Size
”
”
on Risk
on Risk
9.6
9.6
2.4
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
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Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
VENTURE CAPITAL RATES OF RETURN
VENTURE CAPITAL RATES OF RETURN
25%
25%
Third Stage
Third Stage
30%
30%
Second Stage
Second Stage
40%
40%
First Stage
First Stage
50%
50%
Start
Start
-
-
Up
Up
Required Rate
Required Rate
of Return
of Return
Stage of
Stage of
Development
Development
CONTRIBUTORY ASSET CHARGE
CONTRIBUTORY ASSET CHARGE
After
After
-
-
tax cash
tax cash
flows derived
flows derived
from sale of
from sale of
product
product
After
After
-
-
tax return on
tax return on
capital assets
capital assets
After
After
-
-
tax return on
tax return on
working capital
working capital
Contributory charge on
Contributory charge on
other intangible assets
other intangible assets
After
Executive Master in e-Governance (e-Gov) 2007/08 © 2007 INTELLECTUAL PROPERTY VALUATIONS
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Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
EXCESS RETURNS FROM INTELLECTUAL PROPERTY
EXCESS RETURNS FROM INTELLECTUAL PROPERTY
Return on
Fixed Assets
Return on
Working Capital
Return on
Intangible Assets
Return on
Intellectual Property
Super Return on
Intellectual Property
Commodity
Commodity
Enhanced
Enhanced
Super
Super
Enhanced
Enhanced
---
PRODUCT
PRODUCT
---
---SUPER RETURNS METHOD
SUPER RETURNS METHOD
•
•
No
No
-
-
name bread is sold for $2.50
name bread is sold for $2.50
•
•
Brand
Brand
-
-
name bread is sold for $3.25
name bread is sold for $3.25
•
•
Differential of $0.75 x volume in units =
Differential of $0.75 x volume in units =
additional revenues attributable to trade
additional revenues attributable to trade
name
name
•
•
Subtract additional advertising
Subtract additional advertising
and promotion costs
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Catherine Tremblay, CA, CBV, ASA
Wise, BlackmanLLP
Business and Intangible Asset Valuation
