Traditional intangible assets valuation techniques (Định giá tài sản vô hình theo phương pháp truyền thống)

Traditional Intangible Assets Valuation Techniques
Traditional Intangible Assets Valuation Techniques
An excerpt from Chapter 4 of The Intangible Assets Handbook
By Weston Anson

Traditionally, the methods used to value intangibles have some elements in common with
those used to value tangible assets such as real estate. An important difference in most
cases, though, is in the availability of the necessary data, such as finding comparable
transactions or relevant historical financial information. Often, comparable transactions
or benchmark information needed to establish a logical and intellectually sound basis for
the valuation conclusions of intangible assets are unavailable.
In the last two decades, the intangible asset valuation practice field has grown
dramatically. Traditionally, four different methodologies have been used to value assets,
whether for transaction, tax or litigation purposes; in a going-concern valuation or in
liquidation. We also present herein a fifth method that is frequently used for technology
valuation.
The Cost Approach
The Cost Approach is based on the economic principle of substitution. Essentially, the
premise is that potential buyers will pay no more for an asset than it would cost them to
develop or obtain that same asset or an asset with similar utility in other cases. The Cost
Approach seeks to determine the value of intangible assets by aggregating the costs
involved in their development. On the face of it, this may seem fairly straightforward.
However, there is more involved in the process than simply adding up the receipts for
expenditures associated with the intangibles. Indeed, there are two distinct Cost
Approach methods: Reproduction Cost and Replacement Cost.
“Reproduction Cost” measures the level of expenditures necessary to reproduce the exact
same asset. It is appropriate in situations such as litigation involving specific patents or
when return on investment needs to be measured. Alternatively, the “Replacement Cost”
method measures the expenditures necessary to develop an asset with similar utility and
is appropriate in situations such as determining a target price prior to negotiations or
calculating a basis for suitable royalty rates or transfer pricing.

An important requirement for both methods is that the costs not be determined in
accordance with the historical expenditures that actually took place. Instead, the
necessary expenditures and costs to replace or reproduce the asset should be determined
as of the valuation date. For example, many factors relevant to the asset’s development
may have once been proprietary, but are now in the public domain, and could therefore
be acquired at a much lower cost than was actually included initially. Also, research
methods may have improved in the interim, to the point where only half of the historical
research time is needed to accomplish the same achievements, and this also would affect
the value of the asset
The costs included when calculating value with this approach must be considered within
the appropriate economic environment. Only the expenditures necessary in relation to the
environment in existence on the valuation date should be included. Remember that the
appropriate valuation date may be current or it may be a historical date, and costs would
be estimated as of that date. When using an historical date, it is crucial to utilize the
necessary expenditures related to that date, and not rely on the actual levels of any
expenditures made prior to that date.
The impact of this requirement is twofold. If the cost of any of the relevant components
has changed since the initial expenditure, the current cost needs to be utilized in the
calculations. This will account for any inflation or deflation that has occurred. Also, any
developments during the interim that would materially impact the development process
need to be factored in as well. For example, an invention that took a team of ten
researchers to develop may only take a team of four now.
All costs encountered during development of an intangible should not be included, only
those necessary to duplicate the asset or produce an asset of similar utility. Typically,
these consist of both direct expenditures and opportunity costs. The direct expenditures
will include items such as materials needed in the development process, labor costs, and
some overhead items. One must ensure that the salaries, benefits, and other employment
costs being attributed to researchers associated with the development effort are based on
current practices, not on expenditures from historical efforts.
Overhead and management costs, such as project supervision, utilities, and administrative

costs, should be pro-rated to reflect their true level of involvement with the development
process. Also, when projecting the timetable needed to develop the assets in question,
consideration must be given to the probability of success. Another aspect to remember is
the fact that not all expenditures contribute equal value to an intangible asset. For
example, it is doubtful that expenditures on Super Bowl ads increased the value of the
trademarks and other marketing assets of the brands being advertised anywhere close to
the tens of millions of dollars that are spent each year.
Opportunity costs consist of value of the other courses of action and investment
opportunities that have been passed on, to pursue the development of the subject assets.
Essentially, this analysis should measure the impact of a delayed market entry. In other
words, what could be earned during the period of development if the assets were licensed
today? Also, whether utilizing the reproduction method or the replacement method in a
current or historical environment, the risk of obsolescence needs to be incorporated into
the analysis.
The Cost Approach is most useful in cases where there is no economic activity to review,
such as early-stage technology that is not yet producing revenue. It also is effective at
establishing a maximum price for the asset if the context is a proposed transaction. This
situation exists when there are many candidates for substitution available. The main
drawback associated with the cost approach is that it does not recognize any economic
benefits associated with marketplace activity. For example, there is no mechanism to
incorporate revenue or profit data, and it therefore ignores important data by which the
value of assets is typically measured. Costs that should be quantified in this analysis
include:

· Legal fees
· Application/registration and other fees
· Personnel costs
· Development costs
· Production costs
· Marketing and advertising costs

In any event, the Cost Approach can often (but not always) be looked upon as providing a
floor or minimum value for the intangible assets in question. Exhibit IV-1 illustrates how
reproduction costs can often be different from historical costs:
EXHIBIT IV-1
REPRODUCTION COST APPROACH

Data Development
Labor / Research Costs
Legal Fees
Technology Development
Other
Historic Cost
$1000
$1,000
$1,000
$10,000
$1,000
Current Cost
$0
$5,000
$5,000
$1,000
$10,000
Totals
$14,000
$21,000

The Market Approach
In the Market Approach methodology, intangible assets are valued by utilizing actual
transaction values derived from the sale, license or transfer of similar assets in similar

markets. This approach is best if an active market exists that can provide several
examples of recent arm’s length transactions and adequate information on their terms and
conditions. However, most intangible assets are not traded frequently enough to be able
to establish a value using market-based comparables. Since most intangible assets are
considered unique by definition, it is also difficult to ensure that a truly comparable
situation exists. Moreover, it is often very difficult to get enough details on the few
available transactions to be certain that all the elements that make for a good comparable
have been revealed.
When the necessary data can be found, the Market Approach has increasingly become the
preferred approach in the valuation of intangible assets. This is because the Market
Approach is practical, logical, and applicable to all types of intangible assets. In contrast
to the other methodologies, the strength of the Market Approach is its reliance on market
sales, rents, and transactions.
In addition to the type of asset, information necessary to establish comparability includes
the relevant industry, geographical constraints, exclusivity, payment mechanisms and
timeframe, among others. It is also important to know if the transaction was related to a
bankruptcy filing, litigation, judgment or other forced transactional divestiture. These
may render the comparable transaction unsuitable for the analysis in the absence of
compensating adjustments as they will reflect forced/artificial values. Also, pay close
attention to the conditions of the market at the time a transaction takes place, as these will
influence the sales or license terms. Along with the possible adjustments listed above, the
price information contained in comparable sale and licensing transactions will frequently
have to be adjusted using a common reference point such as sales, profit margin or net
income.
As with the Income and Relief from Royalty Approaches discussed below, the value
conclusion can be reviewed at any time subsequent to the analysis to see if any
adjustments are necessary. When reliable transaction data are available, the Market
Approach is considered the most direct and systematic approach for determining an
accurate value for intangible assets.
EXHIBIT IV-2

MARKET COMPARABLES APPROACH
Agreement A – $8M cash
Agreement B – $9M
Ø $4M now, $5M over two years
Agreement C – $10M
Ø $2M per year over five years
Agreement D – $8.5M cash
Agreement E – $9M cash
CONCLUDED VALUE = $8M - $9M
*Based on comparable data interpolation

The Income Approach
Estimating the future income streams expected from the use of the intellectual property or
intangible asset being valued is the core concept of the Income Approach. The future
income streams are then discounted via present value calculations to determine their
current value. This is one of the most widely used approaches, because the information
necessary to determine value using this approach is usually relatively accurate, and often
readily available. The parameters used include:
· Future income stream
· Number of years of the income stream
· Risk associated with the generation of the income stream
The most common error in applying this approach is the failure to differentiate between
the business enterprise value and the value of the intellectual property that supports the
business. One must separate the intellectual property income stream and value from the
value and income stream of the business as a whole. While related to the Income
Approach, the Relief from Royalty and Technology Factor Approaches presented below
are two methods for better ensuring that the analysis only measures the portion
attributable to the intangible assets; since they analyze value or revenue attributable only
to the intangibles.
With the Income Approach, an asset is worth the present value of the future economic

benefits (income or net cash flow) that will accrue to its owner. It requires a projection of
future income, an estimate of the likely duration of the income stream, and an estimate of
the risk associated with generating the projected income stream. The projection of future
income incorporates expected sales of products or services that feature the intangible
assets. Of course, an accurate forecast of revenue depends on understanding the
competitive and economic environment in place during the appropriate timeframe for the
valuation. The length of the forecast is dependent on an accurate estimate of the asset’s
remaining useful life. This will incorporate factors such as potential obsolescence,
historical usage, and expiration of the period of transaction.
The discount rate used in the present value calculations must incorporate the many risks
associated with the generation of the future income. These include the overall market
risk, specific industry risk, and risks associated with the assets and operation being
analyzed. Although it may seem less precise than the cost approach due to the inclusion
of multiple estimates, the information needed to make these estimates can be accurately
developed and verified. Given sufficient data availability, an additional benefit of this
approach is that it provides the ability to perform sensitivity analyses by adjusting the
value parameters, which allows management to better understand the importance of the
various factors driving value in their particular situation.
EXHIBIT IV-3
INCOME APPROACH
Annual Company Revenues $60M
Portion Attributable to IP Portfolio 18%
Years of Future Use 4.5 years
Discount Rate 16.0% .
VALUE = $40.8M

The Relief from Royalty Approach
With this method, the value of the intangible assets is calculated as the present value of
the royalties that the company is relieved from paying as a result of ownership of the
assets. In other words, this approach provides a measure of value by determining the

avoided cost. The Relief from Royalty Approach measures value by estimating future
revenue associated with the asset over its remaining economic life and then applying an
appropriate royalty rate to the revenue estimate. Of course, if the assets generate revenue
directly via licensing, the royalty stream is utilized in the valuation analysis.
The royalty rate segregates the portion of value that is attributable to the intangible assets
from the value of the overall operation. The use of marketplace royalty rates in this part
of the analysis lends additional credibility to the value conclusions. The present value of
the estimated royalty payments is then calculated using a discount rate that incorporates
all the associated risks involved in achieving the revenue forecasts and royalty streams.
When identifying appropriate royalty rates for this analysis, any license agreements that
are reviewed should be of an arm’s length nature, and feature attributes similar to the
circumstances surrounding the subject assets. As with the comparables outlined in the
Market Approach section, these parameters include the type of asset, relevant industry,
geography, exclusivity, sub-licensing and advertising constraints, payment mechanisms
and the appropriate timeframe.
The range of applicable royalty rates discovered during the analysis will most likely be
fairly wide. For example, royalty rates for entertainment-oriented trademarks may range
from 5% to 15% of net sales; and for various technologies, from .25% to 20%. The
differences among the various agreements will largely be due to the relative strength of
the properties being licensed, product usage, competitive advantage, and their market
share characteristics. Of course, the profit margins associated with the products upon
which they are being utilized will also have an impact on the level of appropriate royalty
rates. It goes without saying that, all else being equal, a property commanding a rate of
15% of net sales is going to be much more valuable than a property commanding 5% of
net sales.
Obviously, the key to an accurate valuation is to utilize the correct royalty rate in the
calculation. A relative strength analysis of the assets will help to narrow the range of
royalty rates to one that is more appropriate. Factors that will influence the relative
strength analysis include growth rates, market share, duration of use, registration and
legal protection, potential obsolescence, and barriers to entry. The makeup of distribution

networks and marketing campaigns will also have an impact. Again, these are all
elements in determining the context in which the assets are utilized and, thus, how their
value should be measured.
An objective analysis of factors such as these will determine if an appropriate royalty rate
is closer to the 5% rate or the 15% rate in our example. Since this method uses royalty
rates that are based on marketplace transactions and uses a forecast of revenue/royalty
income, the Relief from Royalty Approach is often considered to be a combination of the
Income Approach and the Market Approach.
A Note of Caution: In the last decade, The Relief from Royalty Approach has become
misused and abused. Too many valuations are based on theoretical “marketplace royalty
rates.” It is true that some intellectual property, particularly trademarks, patents, brands,
and copyrights, do have comparable market royalty rates that are readily established.
However, for many intangible asset valuations, comparable royalty rates are speculative
at best. Also, there is no such thing as an “exact” comparable royalty rate, and any
valuation project that claims to present exact comparables is flawed in its basic premise.
When appropriate royalty rate comparables and/or calculations are available, however,
the Relief from Royalty Approach is a very effective valuation methodology.
EXHIBIT IV-4
RELIEF FROM ROYALTY APPROACH
Annual Sales $1.0M
Royalty Rate 6.0%
Remaining Life 7 years
Discount Rate 16.5% .
NET PRESENT VALUE = $350,700

The Technology Factor Approach
This is another method, applicable only to technology, which is gaining acceptance. The
Technology Factor Approach is designed to measure the portion of a business unit’s
overall market value that is based on the utilization of the underlying technology. The
willing buyer/willing seller aspect of the fair market value definition is incorporated into

this method by scoring a series of attributes as to whether they favor a buyer or a seller in
a hypothetical negotiation.
As with the Relief from Royalty Approach, the first step is to project operating results for
the organization using the technology. The present value of this cash flow is then
calculated using a discount factor that encompasses all risks associated with the
generation of the estimated future results. Accurate use of this technique depends on
ascertaining the appropriate Technology Factor scale. This factor is determined by
establishing an upper limit for the contribution of value provided by technology used in
that particular industry, and then performing a relative strength analysis via various utility
and competitive attributes, to narrow the contribution of the subject technology to a
specific percentage within that upper limit.
The upper limit represents the maximum percentage of total business value that can be
attributed to technology in that particular industry. Industries whose products feature
large contributions from technology, such as scientific instruments and medical devices,
will have relatively high upper limits, while those with products requiring little
contribution from technology, such as minimal extraction will have relatively low upper
limits.
Once an appropriate upper limit has been determined, various competitive and utility
attributes that reflect the strengths and weaknesses of the technology are reviewed.
Examples of utility attributes typically included in the analysis are the current stage of the
technology, the level of capital required to commercialize the technology, the size of the
potential market and the margins associated with the operation. Competitive attributes
may include the existence of alternative technologies, the potential for obsolescence, the
likely response by competitors and the technology’s potential to displace existing
products.
These attributes are selected, weighted, and scored based on the circumstances specific to
the unique valuation assignment. Depending on how they are scored, some attributes may
indicate a higher value, others a lower value, and others may be neutral to the final value.
Not all attributes will be of equal importance and are, therefore, weighted accordingly.
The utility and competitive attribute averages may also be weighted, according to their

relative contribution to the overall determination of technology value. The mean of these
two averages (utility + competitive) is then taken to arrive at the final Technology Factor.
The resulting Technology Factor is then multiplied by the net present value of the subject
business unit to arrive at the value of the technology. The value of the technology is thus
segregated from the value contributed by other assets of the business.
Because the upper limit is based on the contribution of all intangibles to overall value, it
limits the validity of the Technology Factor Approach when used on any operations that
feature a mix of both technology and other intangibles. Similarly, the presence of several
different technologies in one product can lead to erroneous conclusions when trying to
determine the value of only one of them. The Technology Factor Approach is very
effective, however, when analyzing a technology for licensing, or other situations where
the analyzed technology is the only one found in the subject operation. This is often the
case when reviewing business units.
EXHIBIT IV-5
TECHNOLOGY FACTOR APPROACH
Upper Limit for X Industry: 50
Calculation Formula:
Weight Attribute Score

1 Stage of the Technology +1
2 Capital Required - 2
1 Market Size +2
(Upper limit x (weight x score) ) = attribute factor

50 x (1 x 0.75) = 37.5
50 x (2 x 0) = 0
50 x (1 x 1) = 50
(37.5 + 0 + 50) / 4 = 21.875

In the abbreviated example above, the Technology Factor is calculated to be 21.9. This

indicates that approximately 22% of the subject organization’s value is attributable to the
associated technology. For simplicity’s sake, this example does not differentiate between
utility and competitive factors.
The 5 valuation methods discussed above represent the most widely used methods in
valuing intangible assets. Understanding the nuances of each method will help determine
which method is most appropriate for the intangible asset or assets in question. In sum:
o The Market Approach should be used in all instances where comparable sales or other
transactions can be identified that are very similar to the intangible asset being valued.
o The Cost Approach, using either the replacement or reproduction focus for the
analysis, is often used as a secondary method to measure the value of an asset.
o The Income Approach, and/or Relief from Royalty Approach are used where specific
income levels and/or streams of real or imputed royalties can be identified for a given
asset bundle.
o The Technology Factor Approach is useful with unique technologies. All five methods
are good, all can be used in many situations and, in all situations, and at least two of the
methods should be employed whenever possible.