Finding & Analyzing Royalty Rates

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18 Νοε 2013 (πριν από 3 χρόνια και 4 μήνες)

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Finding & Analyzing Royalty Rates

Factors of Comparability Impacting Market Royalty Rates & Intangible Property Valuations

© Copyright ktMINE 2011. All rights reserved. www.ktMINE.com


Agenda


What Is Important? (Intangible Property Inventory)


Why Is It Important? (Key Events)


How Much Is It Worth? (Valuation)


How Do I Benchmark It? (Finding & Analyzing Royalty Rates)


In Action (Case Studies)

2

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IP Inventory



Manufacturing intangibles such as patents, inventions,
formulations, recipes, processes, technical information, designs,
patterns, or know
-
how


Marketing intangibles such as trademarks, trade names, trade
dress, brand names, or service marks


Copyrights and literary, musical, or artistic compositions


Franchises (or business systems)


Software or source code


Methods, programs, systems, procedures, campaigns, surveys,
studies, forecasts, estimates, customer lists, training materials,
future sales/order books, or use rights


Strategic and defensive patents, trademarks, etc. (patent trolls)


Intangible generating services: research and development,
engineering, or marketing

3

© Copyright ktMINE 2011. All rights reserved. www.ktMINE.com


Agenda


What Is Important? (Intangible Property Inventory)


Why Is It Important? (Key Events)


How Much Is It Worth? (Valuation)


How Do I Benchmark It? (Finding & Analyzing Royalty Rates)


In Action (Case Studies)

4

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IP Stakeholders

5

Owners of IP


Investors


Licensors/Licensees


Governments/Tax
Authorities


Damages


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Key Events
-

Governments


2011 budget submitted by the Obama Administration included a
proposal to redefine intangibles under Sections 367(d) and 482 to
include workforce in place, goodwill and going concern value.
The budget also included a provision which takes a more direct
approach to attacking migration of US
-
developed intangibles


2011: European Union sets out its plan to overhaul IP rules in its
bloc, including the protection of IP and prevention of migration of
intangibles.


Anticipation of similar review of IP rules within Asia.

6

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Key Events


Damages Cases


February 5, 2010: Resqnet.com, Inc. v Lansa, Inc.


$506,305
settlement past infringement (hypothetical royalty)


The determination of a reasonable (market) royalty rate requires
factual
findings

that account for
technological and economic differences



January 4, 2011: the United States Court of Appeals for the
Federal Circuit changed deemed the 25 Percent Rule
inadmissible during the Uniloc USA V. Microsoft patent
infringement case (the “Uniloc Ruling”)
$388 million
settlement


Under this rule, licensees pay a royalty rate equivalent to 25 percent of its
expected profits for the product that incorporates the IP at issue.



This court now holds as a matter of Federal Circuit law that the 25 percent
rule of thumb is a fundamentally flawed tool … because it
fails to tie a
reasonable royalty base to the facts of the case at issue
.”


7

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Key Events


Tax Cases


GlaxoSmithKline Holdings (Americas) Inc. v. Comr., No. 5750
-
04
-

$3.4 billion
settlement (marketing intangibles)


Veritas Software Corp. (subsidiary of Symantec Corp.) v. Comr.,
T.C., No. 12075
-
06, 133 T.C. No. 14
-

$2.5 billion
in proposed
adjustments with back taxes and penalties amounting to $1
billion (valuation: income method approach)


Microsoft v. IRS Appeals Division
-

$3.1 billion
to settle an audit
2000
-
2003 for undisclosed issues. Another settlement for 2004
-
2006 period (software intangibles)





8

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Agenda


What Is Important? (Intangible Property Inventory)


Why Is It Important? (Key Events)


How Much Is It Worth? (Valuation)


How Do I Benchmark It? (Finding & Analyzing Royalty Rates)


In Action (Case Studies)

9

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IP Valuation Approaches


Cost Approach


Market Approach


Income Approach

10

Require you find market royalty rates

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Relief from Royalty Method (Income Approach)


The relief from royalty (or royalty savings) method values the
asset as the present value of after
-
tax royalty payments. The
supposition

is that,
if a firm did not possess a certain intangible,
it would be willing to pay a royalty for the use of such an asset.



The idea of:

substitutes




In application, the appropriate royalty rate to projected revenue
must be estimated.

11

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Relief from Royalty Example

12

USD (millions)
Fiscal Year Ending December 31,
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Projected Revenue
$75.0
$82.5
$95.0
$100.0
$105.0
$109.2
$113.6
$117.0
$120.5
$123.5
Growth Rate
10.0%
15.2%
5.3%
5.0%
4.0%
4.0%
3.0%
3.0%
2.5%
Percent Attributable to the Intangible Asset
100.0%
95.0%
90.0%
80.0%
65.0%
50.0%
35.0%
10.0%
5.0%
0.0%
Projected Attributable Revenue
75.0
78.4
85.5
80.0
68.3
54.6
39.7
11.7
6.0
0.0
Royalty
5.0%
3.8
3.9
4.3
4.0
3.4
2.7
2.0
0.6
0.3
0.0
Income Tax @
40%
1.5
1.6
1.7
1.6
1.4
1.1
0.8
0.2
0.1
0.0
After-Tax Royalty
2.3
2.4
2.6
2.4
2.0
1.6
1.2
0.4
0.2
0.0
Partial Year Adjustment
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
Present Value Period
0.50
1.50
2.50
3.50
4.50
5.50
6.50
7.50
8.50
9.50
PV Factor @
15.0%
0.93
0.81
0.71
0.61
0.53
0.46
0.40
0.35
0.30
0.27
Present Value of After - Tax Royalty
$2.1
$1.9
$1.8
$1.5
$1.1
$0.8
$0.5
$0.1
$0.1
$0.0
Total Present Value
$9.8
© Copyright ktMINE 2011. All rights reserved. www.ktMINE.com


Royalty Rate Sensitivity


4% = $7.8 Million


5% = $9.8 Million


6% = $11.8 Million



13

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Agenda


What Is Important? (Intangible Property Inventory)


Why Is It Important? (Key Events)


How Much Is It Worth? (Valuation)


How Do I Benchmark It? (Finding & Analyzing Royalty Rates)


In Action (Case Studies)

14

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ktMINE Finding & Analyzing Royalty Rates

15

Internal Market Royalty Rates

External Market Royalty Rates

Determine Existence of Market Royalty Rates

Assess Comparability

Functions &

Risks Born

by Licensor

vs. Licensee

Rights to Receive Updates
& Modifications

Profit Potential

Uniqueness of IP

Business Relationship
Between Licensor &
Licensee

Duration

Territory & Field of Use

Exclusivity & Restrictions

Interdependent Comparability Factors

Establish Defensible Market Royalty Rates

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ktMINE Finding & Analyzing Royalty Rates

16

© Copyright ktMINE 2011. All rights reserved. www.ktMINE.com


Agenda


What Is Important? (Intangible Property Inventory)


Why Is It Important? (Key Events)


How Much Is It Worth? (Valuation)


How Do I Benchmark It? (Finding & Analyzing Royalty Rates)


In Action (Case Studies)

17

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Case Study: Factors of Comparability

18

Licensor

(US)


Licensee

(Any Other Country)


Software

Royalty % Net Sales







Real case


taxpayer submits agreements to tax authority claiming
comparability


Comparable license agreements and transactions


Related to the licensing of software


Goal = challenge comparability





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Taxpayer’s Submitted Comparable Agreements

19

Agreement
Licensor
Licensee
Licensed IP
Royalty Rate (Example)
1
INTUIT INC.
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
SOFTWARE
3.0%
2
PALM COMPUTING, INC., PALMSOURCE, INC.,
SONY CORPORATION
PALM COMPUTING, INC., PALMSOURCE, INC.,
SONY CORPORATION
SOFTWARE
4.0%
3
NET PERCEPTIONS, INC.
VIGNETTE CORPORATION
SOFTWARE
4.0%
4
VERITY, INC.
ELOQUENT, INC.
SOFTWARE
6.0%
5
CERTICOM CORP.
DIVERSINET CORP.
SOFTWARE
9.0%
6
PARADIGM SOFTWARE TECHNOLOGIES
EVOLVE SOFTWARE, INC.
SOFTWARE
2.0%
7
CREO INC., CREO PRODUCTS INC., PRINTCAFE
SOFTWARE, INC., PRINTCAFE SYSTEMS, INC.,
PRINTCAFE, INC., PRINTCHANNEL, INC.
CREO INC., CREO PRODUCTS INC., PRINTCAFE
SOFTWARE, INC., PRINTCAFE SYSTEMS, INC.,
PRINTCAFE, INC., PRINTCHANNEL, INC.
SOFTWARE
2.5%
8
MICROSOFT LICENSING GP
INTERCARE DX, INC.
SOFTWARE
4.0%
9
LEGATO SYSTEMS, INC.
CAMINOSOFT CORPORATION
SOFTWARE
5.0%
10
MENTOR COMMUNICATIONS LTD.
OBJECT POWER, INCORPORATED
SOFTWARE
3.0%
11
RATIONAL SOFTWARE CORPORATION
INTERNATIONAL BUSINESS MACHINES
CORPORATION
SOFTWARE
3.0%
12
SRI INTERNATIONAL
CONNECTSOFT COMMUNICATIONS
CORPORATION
SOFTWARE
5.0%
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Ex #1: Taxpayer’s Submitted Summary

20


Parties:
PALM COMPUTING, INC., PALMSOURCE, INC., SONY
CORPORATION


Taxpayer’s Submitted Summary


Grant the right to use and reproduce the Palm Development Environment, the Palm
Software in object code form, and the Palm Materials solely to develop, manufacture,
test and support the Licensee Products (handheld computing or communications
products).


Licensed Intangible:
SOFTWARE


Effective Date:
03/1/2003



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Ex #1:


Issues with Agreement

21


Terms of Transfer and Rights Granted:


2.1
Development and Documentation License
. Subject to the terms and conditions
of this Agreement, Palm Computing hereby grants to Licensee a personal, limited,
non
-
exclusive, non
-
transferable, fully
-
paid license to use and reproduce the Palm
Development Environment, the Palm Software in object code form, and the Palm
Materials solely to develop, manufacture, test and support the Licensee Products.
Licensee agrees that it shall use the Palm OS in all handheld computing and/or
communications devices manufactured or distributed by or for Licensee.


2.2
Distribution License
. …Palm Computing hereby grants to Licensee a … license
to
use, reproduce, and distribute
: (a) the Palm OS, Palm OS Drivers, and Palm
Device Applications, in object code form, solely when embedded into Licensee
Products; and (b) the Palm Desktop Software and Palm Installation CD Files, in
object code form, and Palm End
-
User Documentation solely when bundled with
Licensee Products.


4.3
Maintenance and Support Fees
. Licensee shall pay to Palm Computing fees as
specified in Exhibit D (Royalties and Fees) for maintenance, support, and Updates made
available by Palm Computing to Licensee pursuant to Sections 6.1 and 7.


6.4
Joint Development
. Palm Computing and Licensee agree to jointly develop a future
version of the Palm Software which will incorporate the Memory Stick technology and other
Licensee audiovisual technology to be agreed upon by the parties.




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Ex #1:


Issues with Agreement

22


Terms of Transfer and Rights Granted:


4.3
Maintenance and Support Fees
. Licensee shall pay to Palm Computing fees as
specified in Exhibit D (Royalties and Fees) for maintenance, support, and Updates
made available by Palm Computing to Licensee pursuant to Sections 6.1 and 7.


6.4
Joint Development
. Palm Computing and Licensee agree to jointly develop a
future version of the Palm Software which will incorporate the Memory Stick
technology and other Licensee audiovisual technology to be agreed upon by the
parties.




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Ex #1:


Issues with Agreement


Agreement Type:
JOINT DEVELOPMENT, MARKETING
INTANGIBLE,

SOFTWARE


Effective Date:
03/1/2003

23

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Ex #2:
-

Taxpayer’s Submitted Summary

24


Parties:
NET PERCEPTIONS, INC., VIGNETTE CORPORATION


Taxpayer’s Submitted Summary:


Grant the right to use object code copies of GLE solely for the purpose of developing,
demonstrating, testing, and supporting the Integrated Product (elements of
GroupLens Recommendation Engine to be bundled with, and integrated into, the next
major release of Story Server, that delivers collaborative content management with
dynamic content application server) and not for any other internal productive
purposes


Licensed Intangible :

SOFTWARE


Effective Date:
04/6/1998



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Ex #2:
-

Issues with Agreement

25


Terms of Transfer and Functions and/or Services to be
Performed by Each Party:


Grant the right to appoint Vignette Corporation to act as a worldwide
non
-
exclusive
reseller

of Net Perceptions, Inc. for GLE (a derivative of GroupLens
Recommendation Engine, that enables businesses to foster 1
-
to
-
1 customer
relationships by tailoring web sites to deliver specific and meaningful content based
on user preferences).


3.1
Development and Demonstration License Grant
. NPI hereby grants at no
additional charge to VIGNETTE a nonexclusive, nontransferable right to use object
code copies of GLE solely for the purpose of
developing
, demonstrating, testing, and
supporting the Integrated Product and not for any other internal productive purposes
(the "Development and Demonstration License").



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Ex #2:
-

Issues with Agreement

26


Terms of Transfer and Functions and/or Services to be
Performed by Each Party:


5.2 Branding and Copyright Notices. VIGNETTE will market and
distribute

GLE
during the term of this Agreement under VIGNETTE brand(s).


6.6 Marketing and Advertising. During the effective term of this Agreement,
VIGNETTE, as part of its activities to
promote the distribution
of GLE with the
Integrated Product, agrees to confer periodically with NPI on matters relating to
market conditions, sales forecasting, product planning, and update, promotional and
marketing strategies.



Agreement Type:
DISTRIBUTION
, SOFTWARE




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Ex #3:
-

Taxpayer’s Submitted Summary

27


Parties:
LEGATO SYSTEMS, INC., CAMINOSOFT CORPORATION


Taxpayer’s Submitted Summary:


Grant the right to use the source code to create derivative works and to support
resellers and end
-
users.


Licensed Intangible :
SOFTWARE


Effective Date:
12/13/2002



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Ex #3:
-

Issues with Agreement

28


Terms of Transfer and Rights Granted:


2.2 GRANT OF OTHER RIGHTS. Legato grants CaminoSoft a non
-
exclusive, non
-
transferable worldwide : (i) royalty based right to market, distribute, license and
sublicense

the Software and all
CaminoSoft Derivative Works.


2.4
BRANDING
. Legato hereby grants CaminoSoft a non
-
exclusive license to
use
the trademarks

"StandbyServer," "SnapShotServer," and"OFFsite Archive ,”
(collectively the "Product Trademarks") in the marketing and distribution of the
Software, CaminoSoft Derivative Works, and Documentation; but only in conjunction
with a reference to the NetWare operating system and subsequent versions thereof,
as in ""StandbyServer Many
-
To
-
One for NetWare," "OFFsite Archive for NetWare,"
"OFFsite Archive Many
-
To
-
One for NetWare," "SnapShotServer for NetWare", and
"StandbyServer One
-
to
-
One for NetWare“.


Agreement Type:
MARKETING INTANGIBLE
, SOFTWARE




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Taxpayer’s Submitted Comparable Agreements

29

Agreement
Licensor
Licensee
Licensed IP
Royalty Rate (Example)
1
INTUIT INC.
RETAIL TECHNOLOGIES INTERNATIONAL, INC.
SOFTWARE
3.0%
2
PALM COMPUTING, INC., PALMSOURCE, INC.,
SONY CORPORATION
PALM COMPUTING, INC., PALMSOURCE, INC.,
SONY CORPORATION
SOFTWARE
4.0%
3
NET PERCEPTIONS, INC.
VIGNETTE CORPORATION
SOFTWARE
4.0%
4
VERITY, INC.
ELOQUENT, INC.
SOFTWARE
6.0%
5
CERTICOM CORP.
DIVERSINET CORP.
SOFTWARE
9.0%
6
PARADIGM SOFTWARE TECHNOLOGIES
EVOLVE SOFTWARE, INC.
SOFTWARE
2.0%
7
CREO INC., CREO PRODUCTS INC., PRINTCAFE
SOFTWARE, INC., PRINTCAFE SYSTEMS, INC.,
PRINTCAFE, INC., PRINTCHANNEL, INC.
CREO INC., CREO PRODUCTS INC., PRINTCAFE
SOFTWARE, INC., PRINTCAFE SYSTEMS, INC.,
PRINTCAFE, INC., PRINTCHANNEL, INC.
SOFTWARE
2.5%
8
MICROSOFT LICENSING GP
INTERCARE DX, INC.
SOFTWARE
4.0%
9
LEGATO SYSTEMS, INC.
CAMINOSOFT CORPORATION
SOFTWARE
5.0%
10
MENTOR COMMUNICATIONS LTD.
OBJECT POWER, INCORPORATED
SOFTWARE
3.0%
11
RATIONAL SOFTWARE CORPORATION
INTERNATIONAL BUSINESS MACHINES
CORPORATION
SOFTWARE
3.0%
12
SRI INTERNATIONAL
CONNECTSOFT COMMUNICATIONS
CORPORATION
SOFTWARE
5.0%
© Copyright ktMINE 2011. All rights reserved. www.ktMINE.com


Agenda


What Is Important? (Intangible Property Inventory)


Why Is It Important? (Key Events)


How Much Is It Worth? (Valuation)


How Do I Benchmark It? (Finding & Analyzing Royalty Rates)


In Action (Case Studies)

30

© Copyright ktMINE 2011. All rights reserved. www.ktMINE.com








Comparable license agreements and transactions


Related to the licensing of manufacturing intangibles


In the production of batteries


Goal = prepare an arm’s length range





31

Case Study: Search In Action

Licensor

(US)


Licensee

(Any Other Country)


Manufacturing IP

Batteries

Royalty % Net Sales

© Copyright ktMINE 2011. All rights reserved. www.ktMINE.com


Our search results have uncovered 31 agreements


Search Filters

© Copyright ktMINE 2011. All rights reserved. www.ktMINE.com


Scanning Summaries

The
next
step is to check for relevant agreements by scanning pertinent licensing terms


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Validate by Viewing Full Agreement

34

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26 agreements in our set of 31 contain Net Sales royalty rates

Results


% Net Sales

© Copyright ktMINE 2011. All rights reserved. www.ktMINE.com


In Summary


There are various intangibles to consider, not just patents and
trademarks


Global governments, tax authorities, and courts are focused on
the valuation and migration of intangibles


Valuations are sensitive to the selection of royalty rates...real
money is on the table!


Finding a perfect comparable is nearly impossible


Finding good market benchmarks is possible


Specific attention should be paid to the factors of comparability


Nothing substitutes for the reading of license agreements

36

© Copyright ktMINE 2011. All rights reserved. www.ktMINE.com


Finding & Analyzing Royalty Rates

Jeff Cozzo, ktMINE

p: 312.253.0929

e: jeff.cozzo@ktMINE.com



David R. Jarczyk, ktMINE

p: 773.401.8962

e: david.jarczyk@ktMINE.com














Factors of Comparability Impacting Market Royalty Rates & Intangible Property Valuations