I had the opportunity to exchange with Jeff Anderson from Consor, California-based intellectual asset consulting firm. Jeff and Weston Anson, Chairman of Consor, wrote the section of my book on IP valuation.
I hope you will realize, as I did, just how critical IP valuation is in any IP secured lending transaction.
KH: What is covered in your contribution to the book Secured Lending in Intellectual Property?
JA: Our contribution provides insight on how to value intellectual property. We describe the common valuation methodologies - cost, income, market, and relief from royalty - as well as various alternative valuation methodologies. We also cover major issues that arise when doing valuations, and the changing landscape in both business and legal contexts.
We then address monetization strategies – sale, licensing, securitization, sale and leaseback – and provide examples of which strategies are best to employ, given the specific context. We wrap up our contribution with five different case studies to show how some of the different methodologies are used, and to help the reader understand the art involved in deciding which valuation approach is most appropriate.
KH: How important is valuation of IP in a secured lending transaction?
JA: We would ague that valuation is the single most important element of IP secured lending! After all, if the true value of the underlying IP asset is not understood, the lending institution could be taking on significant risk, or, in the inverse, it may not be capitalizing on a viable opportunity.
Too often we get lenders coming to us, after they have already lent on an IP asset, asking us to help them sell the asset in default. Many times, the IP is worth a small fraction of the principal owed. Had the institution properly valued the asset beforehand, they would not have found themselves in a precarious situation.
KH: What is the biggest challenge in valuing IP assets?
JA: We often use the word ‘context’, and for good reason. Context is the most important element to understand for any valuation. If the context is not framed properly, the value conclusion will likely be incorrect. As IP valuation experts, it is our role to ask as many questions as possible to fully understand the parameters in which our valuation is to be conducted. What geography are we looking at? For whom is the value calculated: the buyer, the seller? What rights are included with the IP asset? Is this a liquidation value? What legal and competitive issues can impact the IP assets?
The second biggest challenge is collecting the necessary data. Depending on what information is available – past licensing examples, specific profitability of the IP, increased revenues, reduced costs, market growth, etc. – we may need to consider using one or more valuation methodologies. We often do not know at the beginning of an assignment what valuation approach we will use, as it is highly dependent on the data and information that is available. This is not only true of a company’s internal books and records, but also of external research we conduct on publicly available royalty rates or licensing structures, and the growth of specific industries, for example.
KH: What are the main difference between the value of IP assets as a going concern and such value in liquidation? Is there a market for IP in liquidation?
JA: The value of IP, in a going concern, will almost always be higher than in a liquidation scenario. The real question is to what degree is there a difference in value? That really depends on the specific asset at hand, and the market in which it is being utilized. If it is a highly specialized patent for example, with few other competitors, and limited market presence, the liquidation value could be a tiny fraction of the going concern value. This is because there may be few, if any, potential buyers of the patent, and market demand may be de minimis. On the other hand, a well-known trademark that is being sold in liquidation because of poor financial management of the parent company, may have value very close to the going concern value. Of course, the time that is allowed to lapse between going concern and liquidation event, will dramatically impact the value. The longer it takes to sell an IP asset in liquidation, the less value that will be extracted from it.
KH: How does CONSOR assist companies in leveraging their IP?
JA: CONSOR is a full-service IP consulting firm – we are experts at the intersection of IP and money. We have helped clients to understand the full potential of their IP, since our inception over 30 years ago. From startup to maturity, and from local bio-tech’s and small businesses to Fortune 100 companies, IP is a valuable asset to leverage at any stage in a company’s life. Leveraging IP assets successfully can help an organization build and sustain effective strategies over the long-term. These strategies include:
Sale and lease back
Fully paid up licenses
Joint Venture with IP as contribution
Bundling of patents, trademarks, and associated intangibles
We work with clients and their IP counsel to help companies convert their IP into successful monetization strategies that fully realize the value of a company’s IP portfolio, at all stages in an organization’s life. We can be reached at 858-454-9091 or firstname.lastname@example.org.