Valuation of an intangible asset (technology / R&D)

MTDK's picture
Rank: Senior Chimp | 21

Hi,

How would you estimate the value of an intangible asset, more specifically an R&D formulation?

I represent an industrial buyer, who is considering to acquire an R&D formulation from a competitor. The products can be sold to our clients current customers, but will require some minor modifications. The estimated product life cycle of the technology is estimated by our client to ~7 years. The R&D formulation / products are not commercialized yet, and has no brand attached to it.

What methods would you use to estimate the value of such technology? The relief from royalty method appears obvious, but can I sanity check the value with other methods?

Thanks!

Comments (17)

Apr 27, 2017

DCF. I would imagine this would be very similar to valuing a clinical stage drug in pharma/biotech. Build out a revenue projection, incorporate costs associated with those revenues and then back into what you can pay upfront for the R&D formulation to achieve a given hurdle rate (or if you have a value already, your estimated IRR). Can also adjust for probability of success if you are not 100% sure it will make it to market after modification.

May 2, 2017

Thanks! I believe this is an alternative to the Relief from Royalty method. Could you give me an example on how to estimate the contributory asset charge? In order to produce the products that are acquired, an existing production facility / equipment must be in place. How would you estimate a "charge" on this?

Best Response
May 2, 2017

This is something that could be a very complex exercise and you may want to seek the help of a Big 4 Valuation professional (I worked in valuations previously, so I have an idea).

When you are talking about taking contributing asset charges, you are not using the relief from royalty method but the excess earnings method. The premise of the excess earnings is you are taking charges for things like fixed assets, nwc, trademarks and any other assets (intangible or tangible) that the R&D may need to commercialize the product or progress the technology. The idea is once you take out all the other charges, you are then down to the pure intangible asset value.

Also, if you are R&D you will most likely need to split out the R&D into Developed Technology, IPR&D and Future Technology (typically grouped with goodwill). Each split will be amortized over different lives.

This is a high-level overview that can get very complex and subjective, that's why I would suggest a professional if you think this is something that could be material.

    • 2
Apr 27, 2017
May 2, 2017

First off, I'm no expert, but I did 2-3 VC deals where IP was factored in and if we didn't believe we had rock solid IP, we couldn't do the deal.

If you have the money and this ins't just a personal investment, I would seriously hire a good IP lawyer to do a patent search. Seriously, whether they have provisional or issued patents, it doesn't mean it's safe necessarily. In a lawsuit a judge can score a patent too comprehensive and not valid for all areas it covers. Understand that may sound like an oxymoron, but essentially my understanding is the way the patent applications are written will determine a lot of it's ability to be defended. For example, a patent that covers the application of a technology for it's entire industry likely could lose where as 5 patents issued for the same thing in each industry sub-vertical may stand a better chance.

Now that's just stuff I've learned a little form doing some deals and working for a former head of R&D at a fortune 500. When it came to valuing IP, I don't have a great methodology. Thinking about my deals (more science, less tech), I'm thinking if any of those deals failed, we could probably still sell the IP to a Fortune 500 for 1.0x - 1.5x MoM.

my $0.02

Apr 27, 2017

The cost approach will give you a floor value.

May 2, 2017

bumpity bump, looking for senior monkeys to help me out here

May 2, 2017

bumpity bump

Maybe someone in banking or the like could tell me about valuing intangible assets or working with companies that have big R&D/IP portfolios not yet tapped for revenue?

May 2, 2017

Trademark valuation, Customer relationship valuation - look at the relief form royalty method of valuation under DCF and check out attrition rates

May 2, 2017

IAS 38 forbids certain categories of intangibles to be recognized as assets in the balance sheet, and for those that are allowed an extensive set of requirements must be met. Still, you can have intangibles in the balance sheet if they meet the requirements. Post acquisition you will have goodwill to deal with (IFRS 3), which will give you some (better) picture of the (unidentifiable) intangibles value of the acquired entity. Given that goodwill must be reviewed for impairments periodically (annually under IFRS), they will to some extent represent the valuation of the intangibles of the acquired entity with some accuracy (from the point of view of the auditor of the company, at least). If the acquired entity wasn't acquired, their intangible assets would only be valued before (in the balance sheet) to the extent they met the requirements for that to happen.

"Never believe in anything until it has been officially denied"

May 2, 2017

The intangibles that are usually marked to "Fair Value" as part of an acquisition are often items that have been expensed over time (and therefore not capitalized). Eg, your salespeople create customer lists and maintain relationships as part of their jobs (salary expense), but "customer lists" may be allocated some value as part of acquisition accounting.

To prevent fraud, everyday accounting standards have relatively strict thresholds for capitalization (if you're building a factory, capitalize it as an asset, but if you're marketing, isn't that just an expense?), but acquisition requires recognition of acquired assets at FV -- so these intangibles that the business has been building up over time will get recognized on the acquirer's balance sheet. Make sense?

    • 1
May 2, 2017
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"Never believe in anything until it has been officially denied"