valuation of intangible assets: innovation capital, human

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WIPO Valuation and Commercialization of Invention, Trademarks and Industrial Designs Valuation of Intangible Assets: Innovation Capital, Human Capital, Customer Capital, Supplier Capital, Investor Capital, Location Capital Tehran, October 23 and 24, 2012 Prof. Dr. Ulrich Moser Erfurt University of Applied Sciences

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Page 1: Valuation of Intangible Assets: Innovation Capital, Human

WIPOValuation and Commercialization of Invention, Trademarks

and Industrial Designs

Valuation of Intangible Assets: Innovation Capital, Human Capital, Customer Capital, Supplier Capital, Investor Capital, Location Capital

Tehran, October 23 and 24, 2012

Prof. Dr. Ulrich Moser

Erfurt University of Applied Sciences

Page 2: Valuation of Intangible Assets: Innovation Capital, Human

2

• Understanding Intangible Assets as Business Assets

• Classifying Intangible Assets

• Identifying Intangible Assets

• Analyzing Different Types of Intangible Assets in Context of Valuation

– Technology, e.g. Patent Protected Technology, Trade Secrets, Patent Portfolios

– Trademarks and Trademark Portfolios

– Customer Relationship

– Goodwill

– Others (Software, Databases, Know How)

Agenda

Valuation of Intangible Assets

Page 3: Valuation of Intangible Assets: Innovation Capital, Human

Intangible Assets in Accounting

January 1, 20xx – Book Values

Working Capital

Tangible Fixed Assets

Market Value of Equity

Market Value ofDebt

Intangible Assets

The amount of Intangible Assets shown in

balance sheets is typically (very) low

Page 4: Valuation of Intangible Assets: Innovation Capital, Human

4 04.07.2008

Intangible Assets are Business Assets

Fair Values - January 1, 200X

Working Capital

Tangible Fixed Assets

E

N

T

I

T

Y

E

N

T

I

T

Y

Intangible AssesMarket Value of

Equity

Market Value of

Debt

Page 5: Valuation of Intangible Assets: Innovation Capital, Human

5 04.07.2008

Looking on Intangible Assets

Fair Values - January 1, 200X

Working Capital

Tangible Fixed Assets

E

N

T

I

T

Y

E

N

T

I

T

Y

Intellectual Property AssesMarket Value of

Equity

Market Value of

Debt

Goodwill

Customer Relationship

Contracts

Page 6: Valuation of Intangible Assets: Innovation Capital, Human

6 04.07.2008

Context of Valuation of Assets

Fair Values - January 1, 200X

Working Capital

Tangible Fixed Assets

E

N

T

I

T

Y

E

N

T

I

T

Y

Intellectual Property AssesMarket Value of

Equity

Market Value of

Debt

Goodwill

Customer Relationship

Contracts

Implications• A business is

a portfolio of

assets

• This portfolio

generates the

business value

Page 7: Valuation of Intangible Assets: Innovation Capital, Human

7

• Understanding Intangible Assets as Business Assets

• Classifying Intangible Assets

• Identifying Intangible Assets

• Analysing Different Types of Intangible Assets in Context of Valuation

– Technology, e.g. Patent Protected Technology, Trade Secrets, Patent Portfolios

– Trademarks and Trademark Portfolios

– Customer Relationship

– Goodwill

– Others (Software, Databases, Know How)

Agenda

Valuation of Intangible Assets

Page 8: Valuation of Intangible Assets: Innovation Capital, Human

8

Categories of Intangible Assets

Supplier Capital

• Favorable Contracts

Innovation Capital

• Patents

• Know How

Human Capital

• Assembled Workforce

• Sales Force

Process Capital

• Organization

• Computer Software

Customer Capital

• Customer Relationships

• Trademark

Investor Capital

• Relationships

Location Capital

Page 9: Valuation of Intangible Assets: Innovation Capital, Human

9 04.07.2008

Definition of Intellectual Property

Human Capital

• Experience

• Tacit Know How

• Skills

• Creativity

Intellectual Assets• Programs

• Methodologies

• Processes

• Databases

• …

Intellectual Property• Patents

• Copyrights

• Trademarks

Value Creation Value Extraction

Sullivan/Edvinsson

Page 10: Valuation of Intangible Assets: Innovation Capital, Human

Overview of Customer-related Assets

Marketing-related intangible assets Trade marks

Internet domain names Non-competition agreements

Customer-related intangible assets Customer lists Order or production backlog

Customer contracts Customer relationships

Artistic-related intangible assets Plays Books

Pictures

Contract-based intangible assets Licensing, royalty agreements

Leasing agreements Broadcasting rights

Technology-based intangible assets Patented and unpatended

technologies Software

Databases

Secret formulas, processes

Classification of IFRS 3 / ASC 805

Page 11: Valuation of Intangible Assets: Innovation Capital, Human

Intangible Assets – Alternative

Classifications

Marketing-related

Customer-related

Artistic-related

Contract-based

Technology-based

Marketing-related

Customer-related

Artistic-related

Contract-related

Technology-related

Data processing-related

Engineering-related

Goodwill-related

Human Capital-related

Location-related

Customer Capital

Innovation Capital

Process Capital

Human Capital

Location Capital

Supplier Capital

Investor Capital

IFRS 3 / ASC 820 Reilly/Schweihs Schmalenbach Ges.

Page 12: Valuation of Intangible Assets: Innovation Capital, Human

12

• Understanding Intangible Assets as Business Assets

• Classifying Intangible Assets

• Identifying Intangible Assets

• Analysing Different Types of Intangible Assets in Context of Valuation

– Technology, e.g. Patent Protected Technology, Trade Secrets, Patent Portfolios

– Trademarks and Trademark Portfolios

– Customer Relationship

– Goodwill

– Others (Software, Databases, Know How)

Agenda

Valuation of Intangible Assets

Page 13: Valuation of Intangible Assets: Innovation Capital, Human

Identifying Intangible Assets – Basic Idea

Sales & Marketing

Manufacturing

Procurement

R & D

Human Ressources

Management & Organization

Information Systems

Analysis of Business Model

Sales

./. Cost of Sales

./. SG&A

Operating Profit

./. Tax

NOPLAT

./. Changes WC

./. CapEx

Free Cash Flow

Business Value

Capitalization

Free Cash FlowAnalysis

Business Analysis, e.g. Porter‘s Value Chain

Intangible

Asset

Competitive

Advantage

Margin

Page 14: Valuation of Intangible Assets: Innovation Capital, Human

IP Assets in Context of Business – Examples

Product feature is based on patent protected technology

Higher PricesIncreased

Volumes

Cost savings in manufacturing are based on trade secrets

Lower Costs (Higher

Profit Margins)

Selling of products under famous trademarks

Higher PricesIncreased

Volumes

Cost agvantage

Differentiation

Differentiation

Page 15: Valuation of Intangible Assets: Innovation Capital, Human

Identifying Intangible Assets – Conducting the Analysis

Sales & Marketing

Manufacturing

Procurement

R & D

Human Ressources

Management & Organization

Information Systems

Analysis of Business Model

Sales

./. Cost of Sales

./. SG&A

Operating Profit

./. Tax

NOPLAT

./. Changes WC

./. CapEx

Free Cash Flow

Business Value

Capitalization

Free Cash FlowAnalysis

Business Analysis, e.g. Porter‘s Value Chain

Competitve

Advantages

Margin

Page 16: Valuation of Intangible Assets: Innovation Capital, Human

Basic Analysis Tools for Identifying

Intangible Assets

Market Attractiveness

Market PotentialMarket Volume

Market Growth

P E S T Analysis

New

Competitors

Competitors

Intensity of Rivality

Substitutes

Supplier CustomerNegotiation

Power

Threats

NegotiationPower

Threats

Industry StructurePorters Five Forces

Sales & Marketing

Manufacturing

Procurement

R & D

Human Ressources

Management & Organization

Information Systems

Competitive

Advantages

Value Chain

Analysis

Page 17: Valuation of Intangible Assets: Innovation Capital, Human

17

• Understanding Intangible Assets as Business Assets

• Classifying Intangible Assets

• Identifying Intangible Assets

• Analysing Different Types of Intangible Assets in Context of Valuation

– Technology, e.g. Patent Protected Technology, Trade Secrets, Patent Portfolios

– Trademarks and Trademark Portfolios

– Customer Relationship

– Goodwill

– Others (Software, Databases, Know How)

Agenda

Valuation of Intangible Assets

Page 18: Valuation of Intangible Assets: Innovation Capital, Human

Technology and Technology

Portfolios

1.

Page 20: Valuation of Intangible Assets: Innovation Capital, Human

20 04.07.2008

Examples “Packaging”/

“Insulation sleeve”

Packaging Insulation Sleeve

EP

1 3

62 7

93 A

2

Page 21: Valuation of Intangible Assets: Innovation Capital, Human

21

Patents – Analysis of Value Drivers

• Strategic Alignment

• Stage of development

• Innovativeness

• Technology Lifecycle

• Legal status / Validity

• Extent of protection

• Territorial scope

• Age

Legal ProtectionTechnology

• Strategic Alignment

• Product Lifecycle

• Protected Coverage

Product/Process

Commercialization

Patent value

Realization

Market potential

Industry structure

ExploitationBusiness use

Blocking

Competitive advantagesExclusivity

Freedom-to-Operate

Market share

Margin

Complementary Assets

Solution

Value of unprotected

technology

Value of protection rights

Page 22: Valuation of Intangible Assets: Innovation Capital, Human

Products

Components

Business units

Technologies

Patents

Structure of a patent portfolio

Pa 1 Pa 5 Pa 3 Pa 7 Pa 4 Pa 6Pa 2

TRADEMARKS

P 1 P 2 P 3 P 5

BU 1 BU 2

Technology 1 Technology 2

P 4

Technology 3

Page 23: Valuation of Intangible Assets: Innovation Capital, Human

Typical patent portfolios

Number of patent families

Startup SME Global playerZeit

20 - 50

10.000+

300 - 800

Page 24: Valuation of Intangible Assets: Innovation Capital, Human

Distribution of the patent values in

the portfolio

0

500.000

1.000.000

1.500.000

2.000.000

2.500.000

3.000.000

3.500.000

4.000.0001998 P07951

2002 P18962

1995 P07533

2001 P19637

1997 P07898

2000 P07450

1997 P07954

2000 P07459

1999 P07575

2001 P05880

1996 P07602

1994 P07452

1994 P07459

1996 P07430

2002 P12455

2000 P07801/

2000 P07802 - 1a)

2002 P13057

1996 P07593

2002 P01898

2001 P24588

1992 P07404

1992 P07501-2

1992 P07501-4

1992 P07502

1991 P07470Patents

Valu

es

Page 25: Valuation of Intangible Assets: Innovation Capital, Human

Trademarks

2.

Page 27: Valuation of Intangible Assets: Innovation Capital, Human

Charakteristics of Trademarks

Function of Trademarks• authentication of the origin of

goods or services

• buyer can select products seen

in advertisement or previously

purchased

Valuable Trademarks

• Recognizability

• Versatility – applicability to a

wide range of products

• Identification with positive

attributes

„Guarantee“of a certain level of quality or

performance

04.07.200827

Page 28: Valuation of Intangible Assets: Innovation Capital, Human

Trademarks – Analysis of Value Drivers

• Strategic Alignment

• Types of Marks

• Recognition

• Lifecycle

• Potential for Extension

• Range of Protection

• Validity

• Territorial scope

Legal ProtectionAuthentication

• Strategic Alignment

• Price relative to other

Products in industry

• Product Lifecycle

Product/Service

Commercialization

Trademark Value

Realization

Market potential

Industry structure

ExploitationCompetitive advantages

Market share

Margin

Complementary Assets

28

Page 29: Valuation of Intangible Assets: Innovation Capital, Human

Customer Relationship

3.

Page 30: Valuation of Intangible Assets: Innovation Capital, Human

Customer Relationship – Characteristics

Information

Inertia

CustomerBase

CustomerRelationship Product

Critical location

Brand names

Critical Skills

Necessity of

Advertising

Cost of new

Customer

Substitution of

Supplier (Cost)

Commodity – diff.

(+) (-)

(+)*) (-)

(+) (-)

High Low

Low High

Low High

*) not property of business

Inertia low high

Information – Customer records• Useful in selling efforts

• History or other useful information

about customer business association,credit information, previous purchases,

preferences …

Newsstand in large city

Mobile phone provider

Page 31: Valuation of Intangible Assets: Innovation Capital, Human

Relationship between Enterprise and Customer

– Examples

Manufacturer

B-2-B

Wholesaler

= Customer

Consumer

ManufacturerConsumer

= Customer

ManufacturerConsumer

= Customer

B-2-C

Distribution Network

Agent etc.

Page 32: Valuation of Intangible Assets: Innovation Capital, Human

Customer Relationship – Characteristics

time

Sales

CR

IFRS 3 IE 28

time

Sales

Contracts

IFRS 3 IE 26, 27

Customer Relationship IFRS 3 IE 28

the entity has information about the

customer and has regular contact with the

customer

the customer has the ability to make direct

contact with the entity

Contractual-Legal Criterion IFRS 3 IE 26 / 27

If an entity establishes relationships with its

customers through contracts …

A customer contract and related customer

relationship may represent two

distinguished assets

Page 33: Valuation of Intangible Assets: Innovation Capital, Human

Customer Relationship – Criteria of IFRS 3 IE 28

Manufacturer

Customer Relationship

Consumer

Manufacturer

Wholesaler

= Customer

Consumer

= Customer

Information about customer regular contact with customer

Ability to make direct contact with entity

Customer Base

?

Page 34: Valuation of Intangible Assets: Innovation Capital, Human

Customer Relationship – Characteristics

time

Sales

CR

IFRS 3 IE 28

time

Sales

Contracts

IFRS 3 IE 26, 27

Customer relationships may also arise

through means other than contracts, such

as through regular contact by sales or

service representatives

Order Backlog – IFRS 3 IE 25, 29

If an entity has relationships with its

customers through these types of contracts,

the customer relationship also arises from

contractual rights …

Contractual-Legal Criterion IFRS 3 IE 28

an entity has a practice of establishing

contracts with its customers, regardsless of

whether a contract exists at the acquisition

date.

Page 35: Valuation of Intangible Assets: Innovation Capital, Human

Goodwill

4.

Page 36: Valuation of Intangible Assets: Innovation Capital, Human

Components of Goodwill

E

n

t

i

t

y

V

a

l

u

e

Synergies

Going Concern Element

Not identifyable assets

Assets to be developed (future technology, future trademarks, future customers)

Identifyable Assets

P

u

r

c

h

a

s

e

P

r

i

c

e

= Goodwill-Komponenten

Page 37: Valuation of Intangible Assets: Innovation Capital, Human

Komponenten des Goodwill am

Beispiel der SPFair Purchase Entity Future Components Total

Value Price Value Assets of Goodwill Assets

Mio. EUR (1) (2) (3) (4) (5) (6)=(1)+(4)

Entity Value 650,00

Purchase Price 700,0

Customer Relationship

acquired 160,60 160,60

after acquisition date 118,1 118,1 118,10

Core Technology

acquired 161,50 161,50

after acquisition date 7,9 7,9 7,90

Process Technology 20,40 20,40

Assembled Workforce 6,50 6,50

Working Capital 75,00 75,00

Tangible Fixed Assets 100,00 -524,0 -524,0 100,00

Total 176,0 126,0 126,0

Workforce 6,5 6,5 6,5

Goodwill

originär 132,5 132,5

Synergies 50,0 50,0

derivativ 182,5 182,5 182,5

Entity Value 650

Page 38: Valuation of Intangible Assets: Innovation Capital, Human

Software, Databases,

Know How

5.

Page 39: Valuation of Intangible Assets: Innovation Capital, Human

Software

Data Processing Assets IP Protection

Software Copyright, Patent, Trade Secret

Electronic Databases Copyright, Trademark, Service Mark

Mask Works Semiconductor Chip Protection Act

Computer Screen Displays Part of Software

Multimedia Work Copyright

Software Valuation Approach

Product Software Income – Market - Cost

Operational Software Cost – Market – Income

Page 40: Valuation of Intangible Assets: Innovation Capital, Human

Software – Application of Valuation

Methods

Basic approaches

Reproduction Cost

TrendedHistorical

Cost Method

Hybrid Income and Market Approach

Hybrid Cost and Market Approach

Replacement Cost Residual Value

SoftwareEngineering

Model Method

Relief from Royalty

(Cost Savings)

Excess EarningsMethod

MarketReplacementCost Method

Functional Obsolescence

Technical Obsolescence

Economical Obsolescence

Page 41: Valuation of Intangible Assets: Innovation Capital, Human

Cost Approach: Software Engineering

Model

Stages of Software Development

Planning Analysis Design Implementation Time

Steps

Project coordination

Development of an operating

system

design of specific program

Writing specific

program codes

Program testing

Installation and debugging

Preparation of operating manuals

...

Page 42: Valuation of Intangible Assets: Innovation Capital, Human

Software Development Corp. – Product

Software

Revenues

Cost of

Sales

SoftwareLicense

Main-tenance

Customi-zing

Different

Modules,

Price 4.5

Mio.EUR

1.5 to 8.0 of

license

revenues per

customer

Excess Earnings MethodRoyalty

Income

Consul-ting

Applying

softwareUpdates,

hotline

CustomerRelationship

DatabaseTest Data

Assembled Workforce

ChargesCharges

Value of

Software= +

Analysis of P & Land Value Chain

Workflow Management Software for a specific service industry

Customer: Leading companies all over the world

Page 43: Valuation of Intangible Assets: Innovation Capital, Human

Databases – Examples

Customer lists, mailing lists, credit information, financial studies or compilation, scientific data

Directly used togenerate income

Outlicensing,sale

Type Valuation Approach

Sometime dataavailable

e.g. price/rentper name

EUR 2,5/0,5

ReplacementCost / TrendedHistorical Cost

IncomeDifferent Industries Market Cost

Drawings

Trial runs of jet engines

Typically noexternal use

Expected futurecost savings

Not availableReplacement

Cost (?)

Mechanical Engineering, Aircraft Industry

Page 44: Valuation of Intangible Assets: Innovation Capital, Human

Know How - Manufacturing

Assembled

Workforce

WorkingProcesses

Foundry, Steel

Production

Experience of

Production

Specialist

Production of

Paper, Choclate,

Chip board

Recipe, Trial Runs,

Factory Layout

Competitors do

more or less the

same

e.g. time from

order to delivery

is critical in some

Industries

Significant

reduction of

production time

Proprietary Know

How

(Trade Secret)

IncrementalImprovement

ProcessOptimization

CompetitiveAdvantage

Tacit Know How Documentation

Page 45: Valuation of Intangible Assets: Innovation Capital, Human

45

• Understanding Intangible Assets as Business Assets

• Classifying Intangible Assets

• Identifying Intangible Assets

• Analysing Different Types of Intangible Assets in Context of Valuation

– Technology, e.g. Patent Protected Technology, Trade Secrets, Patent Portfolios

– Trademarks and Trademark Portfolios

– Customer Relationship

– Goodwill

– Others (Software, Databases, Know How)

Agenda

Valuation of Intangible Assets

Page 46: Valuation of Intangible Assets: Innovation Capital, Human

Contact

Prof. Dr. Ulrich MoserWP/StB/CVA

Wilhelm-Kuelz-Str. 12

99048 Erfurt

Germany

Tel.: +49 172 73 69 962

Fax: +49 361 6531 646

E-Mail: [email protected]

04.07.200846