Strong intellectual property is instrumental to every business, whether you are a giant corporation or a small start-up. Patent Valuation is crucial for determining the value of an IP portfolio as well as the total value of a company’s assets. Below we will examine the Fair Market Value of a CSP Supplier.
A properly developed patent portfolio valuation is instrumental in developing business strategies and executing successful transactions. It can help develop strong IP monetization strategies, attract larger investments, facilitate IP transactions, determine the specifics of an initial public offering (IPO), and facilitate mergers and acquisitions (M&As).
A common question that many businesses face is related to establishing or verifying what their patent (or portfolio) is worth. The underlying answer is, “it depends.” There are a multitude of factors that affect patent valuation, from the predicted cash flow to comparisons with similar industries and transactions. As we explain in the case study below, there are various common techniques to determine the value of a patent. But, determining an accurate fair market valuation requires additional expertise to identify which methods are most appropriate. We will take you step-by-step through our valuation process for this type of situation.
The company which required our valuation services was a European supplier to concentrated solar power (CSP) plants.
Their invention included the installation of photo voltaic (PV) panels on heat-transfer pipes in order to generate additional energy. This energy source was to be built using existing infrastructure for the pipes, and within close proximity to them, to significantly decrease investment costs.
Their patent protection included the filing of utility patent applications in jurisdictions around the world. A prior art search did not produce anything disconcerting. They had not yet secured any grants and there was no existing evidence of infringement.
The application of their technology involved the creation of simultaneous or parallel production of energy that can eventually be transmitted to a power grid.
How do we begin projects like this to determine the Fair Market Value of a CSP Supplier? Starting with the global CSP capacities by country, our market research included data on projects in many phases of construction to identify accurate sector capacity and expected growth. These project phases included: announced, planning, development, construction, commissioning, and operation. The total global installed CSP capacity in 2018 was 5.5 GW, which is 4 times more than in 2010. That capacity is expected to continue to grow steadily through 2040. Concentrated solar power still accounts for the lowest amount of installed capacity among all renewable sources. It was important to note that this significantly impacts the cost of generating CSP energy.
The team we put together for this project included a total of four experts that covered all required areas of expertise: two technical experts, a financial/business/valuation expert, and an IP strategist and project manager.
The first technical expert holds a Master of Science degree in Power Engineering, has 30+ yrs of experience in power plants, has extensive knowledge on power generation, transmission, related contracts, plant supplies, construction, substations and transmission lines of up to 500 kV, factory
inspection and supervision of equipment. This includes extensive international experiences in Asia, Middle East, Western Europe, Balkans, Africa, Latin America and the US. This person was familiar with the related regulatory bodies and standards around the world.
The second technical expert holds a PhD in Electrical Engineering, has 25+ yrs of experience, and has extensive experience with patent analysis. Additionally, they have experience with solar energy harvesting principles and implementations.
The Financial/Business/Valuation expert has tremendous experience in IP valuation in different fields, including economic damages, lost profits, profit disgorgement, reasonable royalty, antitrust, licensing, acquisitions, divestitures, and more. Their particular expertise in IP includes: calculating economic damages in infringement cases, determining fair market value, and assessing standard essential patents and F/RAND related issues.
The IP strategist & project manager has over 25 years of technology research and development, IP analysis, and management experience. He also holds a PhD, has over 30 granted patents and has multiple contributions to various industry standards.
Our technical analysis included the review of potential applications of the inventive technology. We also analyzed, in depth, the pros and cons of various implementation scenarios — both technically and economically, for New and Retrofit plants.
Our technical experts determined that the client’s contemplated application scenario was not practical. There were regulatory challenges with simultaneous transmission of energy from PV and power from CSP. Furthermore, there were work-around scenarios that proved far more suitable. These work-around scenarios included: storing energy from PV in batteries to extend daily operational hours and providing operational energy to the plant.
We meticulously calculated the energy production and investment requirements of various options and weighed them against each other. This review included all practical requirements for implementation of the technology and allowed us to identify the cost of PV panels and batteries to be the driving factors.
Our regulatory analysis included the review of regulatory conditions around the world. More specifically, in the 17 potential countries (CSP installed or under commission) that include: USA, Spain, Italy, Morocco, Algeria, Egypt, India, Dubai, South Africa, China, Mexico, Saudi Arabia, France, Kuwait, Israel, Australia and Chile. We reviewed their government regulations, rigidity of market structure, and competition from non-renewables, etc.
We also identified locations that were not favored: Europe, China, Israel and Australia. The reason these countries did not meet our favorable regulatory designation are that they had high levels of regulatory requirements (both technical and economic) and a long and arduous approval process that includes (technical analyses, field tests, and grid preparation for stability.)
During our economic analysis, we considered Power Purchase Agreements (PPA) worldwide because PPAs are the most popular form of energy transactions across the globe. These PPAs define revenue terms and credit quality, are typically subject to regulation at state and federal levels, limit power/energy delivery up to a required level, maintain fixed prices to this level, are very rigid in highly regulated countries, and cause excess energy production to be sold at spot market (discounted).
We also considered Grid stability in various countries as this can have significant impacts on expected output. Large amounts of energy increase call for transmission grid price increases. Therefore, the economic advantage of more energy delivery is highly dependent on the particular transmission grids.
Outcome of Analysis
Ultimately, our analyses resulted in a reassurance that the economics would make sense. However, there were certain locations that would be much more favorable to implement the technology. Our final conclusion regarding the technical, regulatory and economic analyses resulted in a recommendation of the specific countries for the implementation of the inventive technology. Our abbreviated notes on the most viable options are below:
Low regulatory hurdles
Large potential for new installations until 2025
Environmental permits already issued
Low regulatory hurdles
Large projects underway
European banks invested there
Relatively lower regulatory hurdles
Large installed capacity and more in planning stages
Large potential for retrofit of older plants
Low regulatory hurdles
Rapid growth of energy demand
Existing CSP plants
We also calculated the Cost-Benefit ratios for various modes of implementation of the technology in much more detail for the client.
So, how did our team determine the fair market value of the technology? We based our findings on the Technical/Economic/Regulatory analysis as well as IP analysis. We performed a review of relevant market transactions, a review of potential infringements, a review of potential alternatives, and an analysis of the total market available. Two of the most common valuation methods are the market approach and the cost approach. We have defined them below, but they were found inappropriate for this scenario. There were no relevant guideline transactions identified and no meaningful non-infringing alternative was found.
The cost approach of patent valuation focuses on two primary questions: how much did the patent cost to create, and how much would it cost to generate a similar one? This approach aims to calculate the total expenses that have been incurred for generating the idea, developing it, patenting it, and maintaining it. Such expenses include direct costs, indirect costs, developer’s profit, and the entrepreneur’s incentives.
Once those numbers are determined, the estimated total cost reflects roughly what you may need to spend in case this process needs to be repeated or replaced.
The market approach is centralized on detecting how much similar patents are selling for and identifying where your patents compare. When analyzing patent valuation, the market approach focuses on three methods: the Sales Comparison Method, the Licensing Rate Comparison Method, and the Comparable Profit Margin (CPM) Method. Through these methods, we can further determine the value of your patent by comparing recently sold patents. Extensive experience is required for properly utilizing these three key methods in order to value patents.
The most popular method of patent valuation is the income approach, which is also know as Discounted Cash Flow (DCF). Through this methodology, you are able to distinguish how much you can earn from the patent through analyzing the value of your patent and investment as the predicted income and cash flows. This approach is multi-disciplinary and primarily evaluates that income generated through the potential licensing of the intellectual property. Projected cash flows from the patent’s life-cycle are discounted to year “0” in order to obtain an appropriate valuation.
The process of licensing refers to the Relief-from-Royalty Payment Method. This system within patent valuation alludes to a company who owns the patent and is licensing it to a separate operating company. The royalty is then computed as the price from the operating company to the company who owns the IP.
Incremental Earnings Method
As part of the Income Approach to valuations, the incremental earnings method was determined to be the most appropriate. This was because the incremental income may be derived by either increased sales or revenue, decreased expenses and costs, and/or a combination of both.
We calculated incremental profit generated through the deployment of the technology and determined the following:
◦ Relevant CSP plants
◦ Incremental energy output
◦ Associated revenue generated from that energy output
◦ Incremental costs necessary to generate that energy output
◦ Appropriate tax rate
◦ Amortization tax benefit
◦ Appropriate discount rate (risks, present value of future income)
We also applied an IP validity discount factor as well that included consideration of the following:
◦ Various statistics on probability of dismissal of all claims at the PTAB
◦ Patent rights enforcement per country
Patent rights enforcement measures an economy’s prevalence of IP rights infringement, the criminal and civil legal procedures available to rights holders, and the authority of customs officials to carry out border controls and inspections.
GHB Intellect is an intellectual property consulting firm that provides hands-on assistance with patent valuation. We provide more than just this Fair Market Value of a CSP Supplier case study, but also thorough consultations and turn-key solutions for our various intellectual property consulting services: intellectual property development support, intellectual property management, intellectual property monetization, M&A support, patent litigation support, engineering support, and other IP consulting issues.
GHB Intellect guarantees to make your patent valuation convenient and cost effective. We work with companies worldwide, have hundreds of experts in high-tech, science, finance, and IP, as well as extensive technical and laboratory resources. Contact us today to request more information about how we can assist you with patent valuation.