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Technology Valuation

Dr. Foo Say Wei

Cost Market Income
Approach Approach Approach

Based on Based on the

Based on the recent present value
cost to create transactions of earnings or
and develop involving the costs avoided
the transfer of attributable to
technology comparable the technology.

The value of the intellectual properties is the

cost of generating the IP plus a reasonable

Philosophical basis: Intrinsic Value can be

determined by a cost pluspricing.
Simple in concept. Focus on the ability and cost
to develop an alternative asset that generates the
same benefits.
However, it does not consider the potential
benefits from successful applications of the
technology. [IBM and Microsoft DOS]
Also, it is often difficult to make accurate cost
estimates say on opportunity cost, value of speed

Information Needed:

The cost of R&D and the cost of protecting the IP

The cost of replacing or reproducing the same

future potential profits

The cost of strategic intangibles


When to use?:
This method is not really a good approach to valuate IPR
of technology.
It may be used to assess the cost of developing a new
technology similar to the technology whose cost is
Technology is narrow in scope and thus easy to replicate
or "design around.
Philosophical basis : The intrinsic value is close to
impossible to estimate.
The value of an asset is whatever the market is willing
to pay for it based upon its characteristics.

Sources of Industry Standard Data: Survey data,

Expert data, Published comparable license
agreements and Financial statements
Limited data available as transactions not frequent and
not made public.
Most technologies are unique and difficult to compare.
This approach is often used in the Valuation of
Houses/Apartments using recent transaction data.

Comparable Transaction Method:

The value can be estimated by looking at how
the market prices similar or comparable
IPR or technology, after adjusting for risk
differentials, and specific factors and
attributes related to industry, firms and

Rating/Ranking Method:

look for comparables and use rating/ranking

to differentiate IP at issue
need to develop scoring criteria, scoring
system, scoring scale, weighting factors and
a decision table
need to translate the rating/ranking score into
a value
Market Decision Table for Rating/Ranking
Approach Method
Beauty is in the eyes of the beholder
Value is in the eyes of the buyer /seller
Value is in the eyes of the buyer /seller

Value is defined as the single time-value

discounted number that is representative of all
future net profitability.
Discounted Cash Flow (DCF) is the standard
financial tool to quantify and discount the cash
flow to a present value.
It is based on estimate of future incomes and
hence consistently undervalues an asset that
currently produces little or no cash flow
Approach Important Financial Concepts

Time Value of Money

Quantitative easing
Discount Rate
Cost of Capital

Net Present Value (NPV)

Approach Time value of money
Approach Time value of money

Money received now is worth more than the

same amount received in the future
Income Risk Assessment for the
Discount Rate

Technical Risk: Stage of Development, $, Time,


Market Barriers: Concentration, Distribution, Diffuse

Management Team: Fit, Expertise, Core Competencies

Protection: Type, Breadth, Strength, Blocking

Approach Discount Factors
Approach Net present value

Information Needed:
Year-by-year cash flow projection, or an estimated potential
A discount rate to apply to these cash flows
The life of the asset
Approach Net present value
Income Discount cash flow
The inputs and information are noisy and
difficult to estimate; they can be manipulated
to provide the conclusion one wants
If future cash flow streams cannot be
accurately predictable .
Not all risks are accounted for by the discount

May be used to determine which of two

technology projects to be adopted.
For example, the cash flows of Projects A and
B are given below.
End Yr 1 End Yr 2 End Yr 3 End Yr 4

Project A $1000 $2000 $3000 $1000

Project B $2000 $3000 $1000 Terminated
End Yr 1 End Yr 2 End Yr 3 End Yr 4

Project A $1000 $2000 $3000 $1000

Project B $2000 $3000 $1000 Terminated

The NPV for the two projects are affected by

the discount rate as shown in the table below.
Discount rate 0% 10% 20% 30%
Project A $7000 $5499 $4441 $3668
Project B $6000 $5049 $4329 $3768
Higher return from Project A Project A Project A Project B

We must deduct the current costs before a decision is made to choose the project.
Market Income
Approach Approach

Combination of methods
(EBITDA multiplier method)
The average price-earning ratio is computed using
market data of similar technology.
The value of the technology to be assessed is
obtained by multiplying the expected earning with
the average price-earning ratio.
Use the EBITDA multiplier method to assess the value
of Company Q.
You may assume that for Company Q, the gross
margin is 25% of revenue and that the total amount of
various overhead to be deducted from the profit is $15
Relevant data for companies in similar business are
given in the table below.

Company EBITDA Market Value

Xenox $55.0 million $270.0 million
Yoney $400.0 million $1650.0 million
Zetra $140.0 million $680.0 million
Suppose that management of Company Q forecasts a revenue
of $200 million at the time one year in the future when the value of
the company is to be applied. A model is constructed to determine
the consequences if the revenue exceeded or fell short of forecast
by stated percentages and the probabilities of their occurrence.
These data are given in the table below.

Percent of Forecast Probability of occurrence

110% 10%
100% 70%
50% 10%
25% 5%
0% 5%
1st, find the EBITDA multiplier
Company EBITDA Market Value
Xenox $55.0 million $270.0 million
Yoney $400.0 million $1650.0 million
Zetra $140.0 million $680.0 million
Total: $595 million $2,600 million

So, multiplier =2600/595=4.37

2nd, find the expected revenue
Percent of Revenue at Probability of Revenue
Forecast this occurrence expected at this
percentage probability
110% $220 million 10% $22 million
100% $200 million 70% $140 million
50% $100 million 10% $10 million
25% $50 million 5% $2.5 million
0% 0 5% 0
Expected $174.5 million
Since gross margin is 25% of revenue, so expected
gross margin is

0.25*$174.5 million = $43.625 million

As miscellaneous costs = $15 million, so

expected EBITDA
=$43.625million -$15million =$28.625 million

So market value of Company Q is

$28.625 million* 4.37=$125.1 million
Summary: Choice of method
No universal method for technology valuation
exists. In fact, different methods will often be
used within one organization.
The method chosen depends on the kind of
technology in question and whether one is a
technology buyer or a technology seller.
Summary: Important issues
What most matters is the accuracy of the
estimations and assumptions about whether a
product will be a success and how much
people will pay for it.
Estimating the size of the potential market
and the adoption rate for the product are both
important in this process.
Summary: Win-Win negotiation
Negotiating is a big part of arriving at a value
for your technology, but remember that
developing intellectual property into
commercial products through in-licensing and
out-licensing is not a zero-sum game.
Both buyer and seller are looking to get
something good out of the deal. And these are
the much-sought win-win deals.
In-licensing and out-licensing
Scenario: Company X has a new technology to
make use of a compound for specific purposes
and they are many other companies (Y) which
have successfully produced this compound.
In-licensing: Target company Y would grant the
company X a license to use its product as the
basis for developing the technology.
Out-licensing: Company would license the target
company Y to make use of the new technology.