Client and Transaction Context:
Our client, a global travel solutions company was concluding a transaction to acquire all assets of an Indian travel e-commerce company on a slump sale model. For purchase price allocation, the acquirer sought valuation of all intangible assets of travel e-commerce company. This Intellectual Property (IP) portfolio comprised of copyrights, and knowhow/trade secrets filed by the company.
Overview of IP portfolio: Software protected by copyright:
The intangible asset portfolio included copyrights on the commercially offered travel software based on a proprietary algorithm and its associated scripts. The software helped patrons in customizing their holidays and enabled selection of different travel options from the inventory. The e-commerce software was not patent protected but embodied substantial business value as the primary intangible IP asset in the portfolio of assets acquired. The company had protected the software by copyright and did not intend to patent it.
Approach and methodology for IP portfolio valuation:
Valuation of IP assets depends on several factors including development timelines, probability of success at various development milestones, regulatory approvals and commercialization pathways. Intrinsic sophistication and competitiveness of product developed, implications for customer acquisition and scale up and projected business metrics are the common drivers for valuation of early stage technology companies. For this IP portfolio valuation comprising of copyrights and trade secrets, we employed Comparable Transaction Approach and the Income Approach. The critical parameters for this software valuation included:
- Assessment of reasonable timeline for valuation modeling: Technology and business model innovation often implies a shorter life cycle for software products. We modeled time period based on this. We reviewed industry benchmarks and made appropriate assumptions around modeling period for revenues and cashflows.
- Revenue Models: The revenue model was based on commissions. As the company generated revenue via a software platform, the expected revenue flow was calculated based on the package booked and the expected commission percentage.
Given the limited lifetime of the IP’s revenue generation potential and the increased intensity of competitive forces, it was assumed that the assets will not continue to generate cash flows beyond the expected revenue generation period of the modeled time. Additionally web traffic based on the past available data of the company website from the analytical tools were also considered for analysis by Sathguru experts. Finally, value of the intangible asset was derived as a sub-component of the Enterprise Value. Rule of thumb from Goldscheider was adapted to context after considering level of protection of the IP portfolio, level of competitive ring-fencing and contribution to business value.
The income modeling was combined with valuation derived from the comparable transactions approach. A judicious choice of comparable transactions was made after considering various factors such as stage of development, nature of product and business etc. After deriving Enterprise Value, we assessed intrinsic value of the Intellectual Property portfolio as a driver of business value.
Case study highlights:
Assessing life cycle for value modeling and level of value attributable to IP: Owing to the short lifecycle of the software products, its lifecycle was assessed based on its contribution to IP competitiveness and the period was modeled. Once the period of product lifecycle was determined, the revenues and cash flows that could be generated for the lifecycle of the product was used for valuation. As the Enterprise value can be attributed to both the value of the IP for the software product as well as other tangible and intangible assets and the commercialization efforts, the value of the intangible asset was calculated. For the copyright valuation, the considerations regarding the stage of development of the product and level of competitive barrier to entry created by the copyright protection were taken into account.
Mapping Comparable: Comparable Enterprise Value was benchmarked to context, as for many early stage technologies the EBITDA is negative and startups valuation metrics are often not linked to revenue. For finding the suitable comparable the public data on Enterprise value, and type of investors were considered. The IP portfolio being valued was being sold to strategic investor who intended to commercially scale-up the product. Hence a comparable with similar intent and structure was chosen.