Brand Valuation

Doug Bania & Brian BussNevium Intellectual Property Solutions

www.nevium.com

University of New HampshireSchool of Law

April 2016

When someone says value . . .

A Few Valuation Basics:• Value = present value of future benefits• Valuation happens every day, only some involve a formal analysis• IP Valuation requires one more step compared to business valuation

When Asked about Valuation, we then Ask . . . • Why: Compliance, Reporting, Transaction, Litigation, or Considering a License?• What: Which assets, or group of assets?• How: What data is available and which calculations will be needed?

Art & Science, but Not Magic

The objective of a valuation is to express an unambiguous opinion as to the value, expressed as a monetary amount, of a business enterprise, asset or resource, or ownership interest therein.

– Based on ASA BVS-I

What is “Brand Valuation”

For these lists, “Brand” includes more than IP

Top 5 “Most Valuable Brands” from three different publications

2015 Brand Valuation Tables (USD Millions, % of TEV at 12/31/15)

Rank Brand Finance Millward Brown Interbrand1 Apple $128,303 21% Apple $246,992 41% Apple $170,276 28%

2 Samsung 81,716 72% Google 173,652 37% Google 120,314 26%

3 Google 76,683 16% Microsoft 115,500 30% Coca Cola 78,423 37%

4 Microsoft 67,060 18% IBM 93,987 57% Microsoft 67,670 18%

5 Verizon 59,843 20% Visa 86,009 47% IBM 65,095 40%

Method Relief from Royalty Excess Profits paired with an apportionment exercise

Apportionment of TEV based on brand strength analysis

The rankings change year to year and the Valuations vary by large amounts Brand appears to include a bundle of IP and Intangibles

Brand or IP?

4

We focus on valuing specific, identified assets; which can be the “Brand Bundle” or a specific IP Assets

• Several published rankings, often cited in financial press

• Brand is loosely defined, but almost always more than the Company’s trademarks

• Sometimes “Brand” value is the difference between market value and book value, or the value of all intangibles and goodwill

• Brand Bundle: TM, Domain Names, and name or logo-based rights

• Identification & quantification of the economic benefits provided to the owner of an IP asset

• Additional profits and/or costs avoided due to ownership or use of the IP asset

• Requires identification of specific assets and apportionment of a company’s total profits to each identified asset

Brand Valuation IP Valuation

Early on,All parties agree on what is being

valued

Which assets will be valued?

TrademarksCopyrights

Publicity Rights

PatentsCopyrights

Trade Secrets

Marketing Assets Technology Assets

Domain NamesCustomer ListsRelationships

Practices / Procedures

Know-how / ResearchTest Results

RelationshipsPractices / Procedures

What other assets are related to the IP?

What Assets are Included in the Valuation?

How IP Contributes to Value

6

Economic Benefits

Monopoly Barrier to entry, exclude others from using

• Pricing power• Greater profit margins

Litigation Seek damages if others use

• Litigation award (PV of award less costs)

• Threat of litigation (force “Monopoly” or “Permission”)

Permission Ability to be compensatedwhen others use

• Value of license (PV of royalties+fees – costs)

• Value if sold

PromotionSignals innovation,uniqueness, source of origin to consumers

• Additional sales• Reduced marketing• Incremental margin

Value is Derived From the Economic Benefits Created

1. Define the Purpose and Context2. Identify, Define & Group3. Consider 3 Analysis Types:

Financial, Behavioral and Legal4. Isolate and quantify the benefits

specific to the IP Assets5. Reconcile the different analytical

approaches employed

Using Valuation Tools, you can value IP Assets; and Evaluate an opportunity to use IP Assets

Valuation of IP Assets

• Purpose is strategic or intrinsic value, need to quantify potential synergies

• Counter-parties are known or identified, and the Analyst can estimate the impact on potential counter-parties

• Goal is to quantify and evaluate the financial and economic net benefits of a transaction

Value of an IP Opportunity

or

Different Purpose . . . but Same Tools

The Value of IP

Effective use translates to financial benefits through greater revenues, and higher profits

(From A to B)

Goal of creating and using IP: A unique product that results in greater demand and/or higher price points

The challenge: how to Quantify these benefits . . .

The Goal of IP Assets

Valuation Approaches

Same Approaches as Business Valuation . . . apply as many methodologies as possible

Standard Methodologies IP Methodologies

Cost Approach

Cost to replace or replicate • Relief from royalty• Relief from pay per click• R&D, Marketing, Investment• Impressions

Income Approach

Present Value (PV) of future benefits• Discounted cash flows (DCF) • Relief from Royalty• Lost Profits / Unjust Enrichment

PV of• Additional margin / profit• Additional volume• Cost savings

Market Approach

Study of transactions• Guideline companies • Guideline transactions• Industry benchmarks

• Comparable acquisitions• Comparable licenses

Analysis of the financial & economic impact of IP Assets will employ one or more of these methodologies

The IP Valuation Process

Two types of calculations:

• Apportion future benefits to the IP, calculate present value of apportioned future benefits

• If a license is reasonable, or if using a Relief from Royalty calculation, apply a royalty rate to a measure of future benefits and check if both licensee and licensor will benefit from the transaction

Both methods require a reasonable forecast of future benefits

Forecasting Future Benefits

Asset Remaining Life (Years)

Cash Flow ($)

Asset Value ($)

IP: Remaining Life, Cash Flow & Value

• IP and the products that use IP have life spans

• Companies can expect perpetual growth, IP cannot

• Benefits from the IP will grow, peak and then decline as other IP and other products take their place

Guiding Concepts

Total Contribution

Patents

IP: Relative contribution

Trademarks & Other Intangibles

Time

Products & Businesses

Business Revenues

Product Life Cycle

IP Remaining Life

Benefit

Today’s Products

ProductsIn-development

Future Products

IP Valuation & Apportionment

Business Value > Value of IP Assets owned by the Business

Apportionment: Identify the portion of future benefits derived from use of the IP Assets

Present Value of Expected

Future Benefits

Value of Business

Intangible Assets

Tangible Assets

Copyrights

Patents

Intangible Assets

Tangible Assets

Trademark

IP depends on other assets and resources in order to generate economic benefits

It boils down to apportionment

Apportionment Framework

Value of TrademarkForecast Profits x Apportionment =

$1,000 year 1 x = $150

year 1

PV of Future Benefit

Apportionment Results

Analysis Type Low HighWebsite Analysis 5% 20%Company Language 15% 25%CUT 8% 12%

Use

% of Profits to IP

15%

= $603

Trademark Valuation Example

Apportionment Tools

Use as many as feasible

• Website Analytics• Social Media Analysis• Scoring Analyses• Company Language Analysis• Comparable licensing transactions

(“CUT”) • Excess profits (“CPM”)• Feature count and comparison• Marketing Mix Analysis• Promotional Use Analysis• Surveys / Interviews /Focus Groups

Tools to Apportion Economic BenefitsApportionment Framework

What is the value of this box?

Present Value of Expected

Future Benefits

Value of Business

Intangible Assets

Tangible Assets

Copyrights

Patents

Intangible Assets

Tangible Assets

Trademark

The Apportionment Model

Present Value of Expected

Future Benefits

Value of Business

Intangible Assets

Tangible Assets

Copyrights

Patents

Intangible Assets

Tangible Assets

Trademark

Applies the Apportionment Framework

• Value of Entire Business• Forecast each source of

revenue (Products & Services)• Identify Key Assets &

Resources (IP and Intangibles)• Develop Apportionment Rates• Value the Forecast

Apportionment Rates• Apply concept of Equal Values

Framework of the Model

6 Step Process

IP Marketplace

Product Marketplace

Valuation Using a Licensing Framework

Licensor

Transaction requires benefit for multiple parties

For LicenseeValue = Revenue –Compensation Paid

(often a Royalty)

Licensee

Customer

For LicensorValue = Royalty – Cost to Develop, Own & SupportIP Compensation

Product Revenue

Value to Both Parties

Both parties expected to

benefit from the Opportunity

Period 0 1 2 3 4 5Forecast Licensee Sales 1,000 1,300 1,495 1,645 1,727 1,761 Growth Rate 30% 15% 10% 5% 2%

Annual Royalty Rate 8% 8% 8% 8% 8%

For IP User (Licensee)Up-front payment (50) Annual Fee (5) (5) (5) (5) (5) Additional Profit Margin 15% 20% 15% 10% 5%Additional Profits - 195 299 247 173 88 % of Sales Royalty - (104) (120) (132) (138) (141) Total Benefits (50) 86 174 110 30 (58) Present Value @ 25% (50) 69 112 56 12 (19) Value of IP to Licensee 180

For IP Owner (Licensor)Up-front payment 50 Promotions Commitment (130) (150) (82) - - Promotions Commitment % 10% 10% 5% 0% 0%Annual Fee 5 5 5 5 5 % of Sales Royalty 104 120 132 138 141 Total Benefits 50 (21) (25) 54 143 146 Present Value @ 20% 50 (18) (17) 31 69 59 Value of IP to Licensor 174

Finding a Reasonable Royalty Rate

Income StatementRevenues

Gross Sales 1,000 100%Discounts 5 1%

Net Revenue 995 100%

Cost of Sales 450 45%Gross Profit 545 55%

Operating ExpensesSales & Marketing 100 10%General & Admin 75 8%Research & Development 50 5%Depreciation 35 4%Other 15 2%Total OpEx 275 28%

Operating Income 270 27%

Other Income / (Expense)Interest, net (55) -6%Non-recurring (45) -5%Sale fo Assets 85 9%Total Other Income (15) -2%

Pre-tax Income 285 29%Tax Expense (100) -10%

Net Profit 185 19%

Not all royalties are

the same

Best for Licensor

Best for Licensee

Fina

ncia

l Ris

k to

Lic

ense

e $ / Unit made$ / Unit SoldGross Sales ($ invoiced)

Gross Sales (Collections)

Net SalesGross ProfitsEBITNet Profits

Level of Benefit Drives the Royalty

Royalty Rates

A reasonable royalty considers: the level of benefit and the allocation of roles

Licensor Activities

Rese

arch

/

Deve

lop

Desi

gn &

Tes

t

Regu

lato

ry /

Ap

prov

als

Man

ufac

ture

Mar

ket

Dist

ribut

e

Serv

ice

Adop

t

Licensee Activities

Allocation of Roles Drive the Royalty

Bringing it all Together

Intellectual PropertyValuation

&

Key Concepts

Why value, and What IP?

Apportionment

Royalty Rates & Reasonable Compensation

Present Value Calculations / Discounting

Forecasting Future Benefits

Thank You

Brian Buss and Doug Bania

Nevium Intellectual Property SolutionsNevium provides solutions for valuing, managing and monetizing intellectual properties and intangible assets. We work with entrepreneurs, corporations, legal counsel and IP owners to analyze and maximize the value of IP and intangibles such as copyrights, trademarks, patents, brands, rights of publicity, websites, customer lists, social media activities, new technologies, and other proprietary assets.

We are dedicated, experienced managers who provide clear, comprehensive and thoroughly researched analyses, reports and evaluations. Our principals have a CFA, CLP, an MBA and an MA with over 30 years of combined business experience. We have worked with clients from a wide range of industries, including: apparel, food, medical technology, not-for-profit, entertainment, transportation, publishing, airlines, music, retail, sporting goods, manufacturing & distribution, photography, trade associations, education and professional services.

The Firm’s experience includes:

• Valuation of brands, patents, trademarks, copyrights, rights of publicity, technologies, domain names, customer relationships, and other proprietary assets

• Expert opinions and testimony have been accepted in Federal Court, US Tax Court, State Court, arbitration and mediation

• Calculation of economic damages and profit apportionment analyses

• Damages due to trademark and trade dress infringement in Lanham Act claims

• Quantify profitability of strategic alternatives for IP owners seeking new means to derive additional revenue and profits from their IP portfolio

• Reasonable royalty and transfer pricing investigations

• Due diligence and transaction advisory for buyers, sellers, licensors and licensees

• Pricing studies and optimal pricing strategies