Smart Intangible Asset Management

IPwe’s Valuation Methodology

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IPwe’s Valuation Methodology

IPwe’s AI-Based Valuation Methodology Summary

On the IPwe’s News page, you have the opportunity to access IPwe’s complete valuation methodology white paper titled “IP Valuation Methodology White Paper.” Authored by Luis Soriano Valdés and Dr. Jonas Block, this white paper delves deeply into the nuances of IPwe’s Valuation Methodology. But, recognizing its 21-page length, this is a valuation methodology summary, so you can quickly understand how we value intellectual property.

IP Valuation Background

IP Valuation Historically

Historically, the valuation of IP has been a challenging endeavor. Intangible assets, such as patents, do not typically appear on the balance sheet, unlike tangible assets. This has led to a lack of transparency, exorbitant costs, and a notable absence of standardization in IP valuation practices. The unique and abstract nature of each patent, combined with its broad coverage limited to specific geographical areas, further complicates the process. Specialized experts typically undertake such valuations, but often only value intellectual property for specific purposes like litigation, M&A, or transfer pricing. While stakeholders might track the sheer quantity of IP assets, this metric often does not provide meaningful context for many of them, making it largely irrelevant.

Value v. Valuation

Value and valuation, though often used interchangeably, possess distinct connotations in the context of assets. Value refers to the intrinsic monetary worth of an asset, representing the maximum amount a buyer is willing to pay a seller in an arm’s length transaction. In contrast, valuation is extrinsic. It’s an analytical process that employs various assumptions to estimate an asset’s worth, and its results can vary based on the inputs used, making it a relative determination. When it comes to patent owners, they find “value” in their IP portfolios in several ways. For defense, it grants them the freedom to operate without infringement concerns. Offensively, it can be used to target companies that might be infringing. Furthermore, these patents can also be leveraged in revenue deals, such as licensing agreements.

IP Valuation Methods

Valuation methods offer a diverse range of approaches to determine the value of assets.

The Market-Based method draws comparisons between similar assets and their transaction values in the market. However, it iss challenging to apply this method manually on a large scale.

On the other hand, the Cost-Based method, represents a conventional accounting approach. This method considers the progression from input to output, which often remains confidential and can be complex to decipher. Additionally, there’s an intricate relationship between research and development and the subsequent revenue streams they generate.

The Income-based method focuses on the discounted cash flow within an asset’s useful life. A unique perspective within this method is the “Relief from Royalty” approach. This considers a hypothetical royalty payment for an asset, and interestingly, it’s not necessarily tied to a single patent. Instead, the valuation can be based on a percentage of revenue or profit.

IPwe’s Approach to Valuation

IPwe’s Valuation Methodology combines publicly available patent and financial data from multiple trusted sources to determine the valuation of patents globally. This model anchors itself in an objective approach, leveraging the Income-Based Valuation Method. A key feature of this approach is that it uses the “relieved from royalty” calculation, ensuring standardization and consistency.

IPwe aspires to be the “Bloomberg of IP,” setting a gold standard in valuation. Central to our mission is a commitment to transparency. This is evident in the meticulous way we expose the data we employ and our use of comparables to offer a comprehensive and clear perspective on patent valuation and how we value intellectual property.

IPwe’s Valuation Methodology Summary

IPwe’s Valuation Methodology follows a structured five-step process to determine the valuation of issued patents.

Step 1 of IPwe’s Valuation Methodology:

First, we determine the target Market (country & 1 out of 30 industries) of the asset to be valued. e.g., Electronics in Canada (CA)

Step 2 of IPwe’s Valuation Methodology:

Then, we complete the Patent Data Workflow (Clarivate/IPwe)

–  We determine the average time until abandonment for issued assets that expired in the Market within the last 5 years (useful life).

–  Then, we collect all issued assets that are currently active in the Market (peer group).

–  We assess the quality and validity strength of each asset in the peer group (patent score)

–  We determine the Novelty and Inventiveness of the segmented first independent claim

–  We collect the claim structure (# of dependent claims, claim type)

–  We find the citation analysis expressed as a score (0-100) and weighted based on litigation intensity

–  Finally, we determine the rank of each asset within the peer group based on patent scores.

Step 3 of IPwe’s Valuation Methodology:

Next, we complete the Financial Data Workflow (FactSet, RoyaltyStat)

–  We determine the annual product and service revenues (revenue stream) in the Market and the CAGR 5 years.

–  We determine the annual R&D spend in the Market.

–  Then, we determine the average patent royalty rate and the company tax rate in the Market.

–  We compute a tech intensity discount factor to strip brand-related revenues out of the revenue stream.

–  We find the relationship between R&D expenses, active patent counts, and product revenue streams per country normalized across all 30 industries.

–  Finally, we apply the tech intensity discount factor to the revenue stream to calculate the aggregate royalty base for all active-issued assets in the Market.

Step 4 of IPwe’s Valuation Methodology:

Then, we allocate the revenues from the aggregate royalty base to the asset being valued and then to each patent in the peer group based on the ranks obtained (patent royalty base).

Step 5 of IPwe’s Valuation Methodology:

Finally, for every year of the remaining determined asset’s useful life, we apply the average royalty rate to the (current and projected) patent royalty base. Then we deduct the company tax rate and calculate the present value of these cash flows. This gives us the total present value of the asset, valuing it solely on saved royalties (without considering infringement or licensing cashflows).

Author
Dr. Jonas Block
Head of Product Management
support@ipwe.com