Case studies

So how does an IP valuation company find a fair liquidation value of intangible assets that at the time of valuation were not in financial trouble? The following two case studies show two approaches for solving this problem.

A manufacturer of commercial equipment was looking to buy another manufacturer of similar yet complementary equipment. Each company was doing about $60 million a year in sales. Both had good reputations in the market place. The acquiring company was looking to borrow $100 million to complete the purchase and provide some additional working capital. The loan was going to be secured by a combination of hard assets, trademarks and technology.

The first step for the appraiser was to perform a relative contribution analysis for the trademark used by the two going concerns. Many relevant factors need to be assessed to ensure accuracy, including market share, pricing premiums, longevity, awareness and the competitive environment. In this case, both companies were leaders within their respective market niches and together would dominate about 75 percent of the market. The following steps were employed to accomplish this:

- Five major customers were interviewed to determine why they purchase this particular equipment.
- Several key employees were sent a survey to solicit their perceptions as to why the products sold.
- The results of the interviews and the surveys were quantified to determine what percentage of a sale was attributable to the good name of the trademarks.

In a going-concern environment, the group of trademarks belonging to the two companies was extremely strong. However, in order to calculate a value in liquidation, a hypothetical company would need to be modeled. This hypothetical company would take over all existing trademarks and technologies and enter the market as a new company with the established trademarks and company name. The value of the IP in liquidation would then be calculated based on the new company's ability to penetrate the market.

A business model was then built for the hypothetical company, and a business valuation was determined taking into consideration projected market penetration, projected earnings, and capital costs to enter the market. To this business value, the contribution percentage of the IP resulting from the surveys, interviews and objective relative contribution analysis was applied and the value of the IP determined. The concluded value of the IP in liquidation for the combined companies was added to the value of the hard assets, and the financing program was approved.

CASE 1

Business Value of Hypothetical New Entrant	$200M
Relative Contribution of IP	25 %
Collateral Value of IP	$50

In the second case, a leading car rental company was in the midst of reorganization. The company was experiencing severe cash-flow difficulties and was entertaining offers to be acquired by one of its competitors. The company was looking to secure $100 million of interim funding to cover its short-term cash needs during the acquisition period. To fully collateralize the interim loan, the lender looked to the company's intangible asset portfolio. To determine the extent of collateral available, a fair-market value appraisal was performed on the intangibles as used by the going concern as a first step and was followed by the calculation of liquidation value — most lenders will want to understand the relationship between these two values prior to loan commitment.

In this particular valuation, multiple assets having significant value were uncovered including trademark assets, franchise rights, reservation systems, customer databases and airport concession rights. After analyzing the various methods for valuing intangible assets, the Income Approach with a Relief from Royalty Method was chosen as the appropriate methodology for the going-concern valuation.

Relief from Royalty is calculated by assuming that the business does not own the intellectual property and thus has to pay a royalty for its use. Essentially, the fair market value is the present value of those avoided royalty payments. This method was selected since the information required for its use is relatively accurate and readily available. To complete the analysis, the appraiser relied upon future revenue projections, comparable royalty rate and sale transactions, discount rate calculations and estimates of remaining useful life for each of the asset bundles.

To value these intangible assets in a liquidation scenario, comparable sales transactions for similar assets in distressed situations served as the primary methodology for the trademark assets and franchise rights. The cost approach was utilized to calculate the minimum replacement value of the reservation system and customer databases. Finally, the airport concession rights were determined to have no value due to the difficulty in predicting whether the airport authorities would approve assignability of the various agreements.

In combination with the hard assets owned by the subject company, the value of the IP in liquidation proved sufficient to cover the interim funding collateral needs and the financing was approved.

	CASE 2
DESCRIPTION	GOING-CONCERN VALUE	LIQUIDATION VALUE
Trademark Assets	$325M	$63M
Franchise Rights	$82M	$14M
Reservation System	$38M	$4M
Customer Databases	$5M	$2M
Airport Concession Rights	$12M	$0
TOTAL VALUE	$462M	$83M

Conclusion

Intellectual property value is more readily available for strategic use than ever before. Whether the IP owner is interested in a straightforward loan using valuable trademarks and customer lists as collateral, or in securitizing the royalty payments associated with licensed assets, there are options available today that will help to reduce risk, increase return and provide flexibility for resourceful owners of intellectual property.