Basic steps to carrying out IP evaluation

Evaluation – it’s a cost/value determination procedure, a part of economic analysis leaning against certain scientific principles and methodological base, in combination of mathematical methods and the subjective judgments of the appraiser based on its professional experience.
According to pt. 4 of the Federal standard of evaluation «Purpose of evaluation and cost kinds», result of an evaluation is summary size of a project cost of estimation. The result of evaluation can be used at determining by the parties of the price for fulfillment of the transaction or other actions with object of estimation, including at fulfillment of transactions of purchase and sale, transfer to leasing or pledge, insurance, crediting, entering in stock (deposit) capital, for taxation, at drawing up of the financial (accountancies) reporting, reorganization and privatization of enterprises, permission of receivership proceeding, accepting of administrative decisions and other cases.
More oven such non-material actives, such as brand, trade mark, commercial mark are evaluated with a view of:

Payment of trade mark as the contribution to an authorized capital stock
Justification of the price of the transaction under the purchase/sale (concession) of a trade mark
Sale of the whole enterprise
At conclusion of licence contracts on use of the registered trade mark for a justification of the rate of a royalty or lump-sum payments
Determining of a damage from falsification of the goods and services, and as consequence occurrence of economic damage connected with use of trade marks
For the purpose of pledge at crediting for an enterprises
For management in cost of business and optimization of taxation
In course of merges and absorption for establishment of cost of trade marks, involved in the corresponding transaction.

Trade mark as subject of research.

Trade marks represent designation, allows distinguishing the goods and services of one manufacturer from the homogeneous goods and services of other manufacturers, and are, thus, means of an individualization of the goods and services.
The Supreme Court of USA on cases of PARK'N Fly, Inc and Dollar Park & Fly, Inc in 1985 has noticed that trade marks are quality and goodwill (prestige) symbols, whose cost grows eventually as a result of use, advertising and increases in sales volumes.
Prestige protection of the companies is performed by means of patenting-right protection of a trade marks. Trade mark right protection in the Russian Federation is given on the basis of its state registration operating within 10 years. Period of validity of registration of a trade mark can be prolonged each time for 10 years.
Modern market of intellectual property can be characterized as arising, but, despite of it interest and demand from organizers/businessmen to its use in various spheres and various economic-legal situations for the purpose of income starts to accrue.
As per rules, intellectual property in enterprise practice can be realized in two basic forms: as a contribution in stock fund of the enterprise or in enterprise economic activities in quality of "non-material actives".
Intellectual property use in authorized capital allows the enterprise and authors - to its founders to get following practical advantages:

To generate considerable in the sizes of capital fund without derivation of money resources and to provide access to bank credits and investments (the intellectual property can be used on equilibrium with other property of the enterprise as object of pledge at receive of credits);
To amortize intellectual property (except for a trade mark) in authorized capital and to replace with its real money resources (to capitalize intellectual property). Thus depreciation charges on the lawful bases remain at disposal of the enterprise, joins in the cost price of production and are not assessed with the profit tax;
To authors and enterprisers - owners of intellectual property to participate in quality of founders (proprietors) in organization of affiliated and independent firms without derivation of money resources.

Documentary to confirm the property rights and to put its objects on balance as enterprise property. It gives the chance to manufacture depreciation of intellectual property and to form corresponding funds of depreciation charges at the expense of production cost price;
To receive additional incomes for cession of rights on use of intellectual property subject matters, and also to provide well-founded adjustment of quotations on production of innovative activity of the enterprise depending on volume of the transferred rights to its use.

Besides, documentary acknowledgement of property rights and intellectual property rights on use, and also reception of official security documents allows:

To provide real surveillance of share market and possibility of lawful prosecution of unfair competitors and "pirates" (infringers of exclusive rights to objects of intellectual property);
To receive additional benefits in business (turnover-capable IP subject matters lead to growth in cost of all business; "successful" trade mark promotes advancement of goods and services in the market, etc.).

Sequence of carrying out an evaluation

Evaluation procedure is established by chapter 4 of standard evaluation "General concepts of evaluation, approaches to evaluation and requirements to carrying out evaluation », and it includes the following steps:
а) conclusion of contract on carrying out evaluation, including task for estimation;

Task for evaluation should maintain the following information:

a) subject matter of evaluation;
b) beneficiary rights on subject matter of evaluation;
c) purpose of evaluation;
d) prospective uses of evaluation results and connected with restrictions;
e) kind of costs;
f) estimation date;
g) term for carrying out evaluation;
h) assumptions and restrictions on which the evaluation should be based upon.

Amount of works on evaluation. Procedure for evaluation.

According to requirements of standard evaluation "General concepts of evaluation, approaches to estimation and requirements to carrying out evaluation », evaluator gathers and analysis the information necessary for carrying out estimation of subject matter of evaluation. The evaluator studies quantitative and qualitative characteristics of evaluation’s subject matter, collects information substantial to the cost determination by subject matter of evaluation by those approaches and methods which on the basis of judgment of the evaluator should be applied at carrying out evaluation, including:
a) information about political, economic, social, ecological and other factors influencing the project cost of evaluation;

c) information about subject matter of evaluation, including constitutivedocuments, evidence about encumbrance, connected with subject matter of evaluation, information about physical properties of evaluation’s subject matter, its technical and operational characteristics, deterioration and obsolescence, past and expected incomes and expenses, accounting and reporting data, estimations concerning subject matter, and also other information about substantial cost determination of evaluation’s subject matter.

Thus, evaluation process — logically relevant and systematized procedure of consecutive decision on problems with use of known approaches and methods of evaluation for removal of definitive judgment about cost/value.
Primary task of the first stage in the course of evaluation — determining the purpose of evaluation or, more generally, — identification of evaluation subject matter and property rights to corresponding object, coordination with the customer of demanded standard (kind/type) cost and date on which cost/value will be specified. Great value can be also revealing intentions concerning the use of further conclusions about project cost and interests of various parties in the evaluated property.
On second stage of evaluation process a plan is made for evaluation with selective application in each specific case of the known methods and approaches, allowing avoiding unproductive expenses and formulating requirements to the necessary information. The evaluation plan gives chance to estimate time and qualitative expenses for conclusion preparation about the project cost and process focus upon search and pertinent analysis to each specific case of information. The contract on estimation consists of well-founded terms and cost for accomplishing the works, taking in view all aspects set forth above.
Third stage in the course of evaluation consists of gathering and acknowledgement of that information on which will be based opinions and conclusions about the project cost. Importance of this stage is obvious, as per on the quality and completeness of collected information from accessible authentic sources directly depend upon the results of work as a whole. Special attention is given to personal inspection on subject matter of evaluation, acknowledgement of reliability on collected information, its utility and urgency.
Fourth stage in the course of evaluation consists of methodical justification and deducing conclusion about a project cost, received with generally appliance to three evaluation approaches. The received results are used for deducing summarized range of market cost.

For example, works according to market cost of the Brand «M...», complied by our company to the well-known in Russia cosmetic enterprise «K …», included the following procedures:

Evaluator studies the documents given by the Customer’s management, relying on them as on authentically both precisely reflecting economic and company financial position. These documents included the accounting data about company activity, and also short-term forecasts of management about expected commercial-economic results.
Evaluator discusses operations with management (representatives) of the Customer the conditional status and retrospective show activity of the company, and also character of present and planned economic transaction.
Evaluator carries out analysis of financial condition status of the Customer, based upon primarily on all the accounting documentation represented by the Customer for 2004-2006, and also on results of handling these documents with company management.
Evaluator carries out analysis of the received information, pursues choice of techniques and specifies market cost a series of trade marks to the Customer.
Preparation of elaborated written report.

As the subject to evaluation brand "M" specified by company "K" was subject to transfer as contribution to the authorized capital repeatedly created company, basic marketing strategy of which was developing of brand "M" in the market for children's goods, for which we carried out analysis of market for children's goods, some endurances of which is reconciled below:

Analysis of the market for children’s goods

Basis marketing strategy of Branch Company "K", in which authorized capital it planned to bring estimated Brand, developing the Brand in market for children's goods in following segments:

Capacity of market for children's goods in Russia in 2006 is estimated by experts in 6,5-7 billion $. Throughout last three years the market for children's goods in Russia is developed dynamically: dynamics in gain is about 15 % per year (see Table 1). The least dynamical segments are children's cosmetics and books.

Table 1. Market dynamics for children's goods and its segments.

	2007.	2008.	Dynamics 2008/2007
The children's goods(as a whole)	8 050	9 258	15%
Children clothes	2 875	3 306	15%
Children accessories	57,5	66	15%
Children toys	195	254	30%
Children books	240	252	5%
Children cosmetics	158	169	7%

Major factors influencing growth of the given market are: growth in incomes of population, increase in share of expenses on children in structure of population’s expenses, changes in style of consumption for children's goods, dynamical developing in specialized retail networks.

Primary audience characteristics

Primary audience of brand "M" in such commodity categories as clothes, toys and books will correspond to primary audience of these marks in the category of children's cosmetics.
Primary audience of brand "M".

Consumers:
• Girls from 4 till 10 years,
• lives in big cities,
• in families with average and above average level of income.

Buyers:
• Women from 25 till 45 years,
• having daughters from 4 till 10 years.
• lives in big cities,
• income level of families form average to above average.
• spends on purchases for children from15-20 % of family’s income.
• usually purchase goods for children in special stores, supermarkets, hypermarkets.
• basic sources of information about children’s goods: self experience, advices from friends and acquaintances, consultations of salesmen, information in sale places.
• basic factors influencing in choice of clothes: safety, naturalness in materials, design, ergonomics (convenience), preferences of the child.
• basic factors influencing in choice of toys: safety, developing functions, ecological compatibility of materials, preferences of the child, design, price (see Table 2).
• basic consumed categories in toys: dolls, accessories for dolls, soft toys, board games, toys for active leisure (balls, hoops, skipping ropes).

Тable 2. Factors in choice of toys (Sotsop’s results, R-TGI, Russia 2003)

safty for the child	96,0
Progressive function	95,8
Ecologically cleaned materials	92,5
Preference of the child	90,8
Age-related recommendation	79,2
Design	78,0
Longevity	52,8
Cost/value	48,1
Availability in shop	40,7
Manufacturing country	34,9
Prestigious marks	21,9
Bonus booklet, coupons, discount/rebates	21,9

REVIEW OF THE STANDARD APPROACHES OF THE EVALUATION

Fig.2

	APPROACHES TO EVALUATION OF IP


Earning	Comparative	Expenditure
Capitalisation method	Transaction method	Method to regenerative cost
Method of discounting future incomes	Method for sectorial ratios	Method for cost compensation

Expense approach

Precondition of the given method consists in, that cost/value of any property depends on expenses for reproduction of similar property.
According to expense approach, the project cost is determined, as overall cost for reproduction of object (or replacement overall cost) minus accumulated deterioration.
Overall reproduction cost is understood as expenses on reconstruction of object in its initial form from the same constructional materials and technology, including in them profit in building (or sale - for vehicles and equipment) the organizations and the investor.
Overall replacement cost is understood as expenses on reconstruction of object similar to functional properties from modern constructional materials and technology, including in them profit in building (or sale - for vehicles and equipment) the organizations and the investor.
Accumulated deterioration is understood as the general loss of cost/value by the object at the moment of evaluation expressed in percentage under the influence of physical, functional and external factors.
In business evaluation, the given approach is realized as the method of net wealth (or summation of actives, or own-market material capital).

Comparative approach

The given approach is based on precondition that the cost of any property depends upon the prices which have developed in the present moment on analogue or similar property.
According to the comparative approach, the project cost is determined by the prices of tenders or recent transactions of purchase and sale similar on the characteristics (comparable) to objects, after entering to these prices of amendments compensating differences in-between estimated and comparable object.
Within the limits of business evaluation this approach is called as the method of companies – analogues.

Earning approach

The given approach is based on the precondition that cost of any property depends upon the range of income which, as expected, will be brought.
Earning approach includes two basic acceptances. According to first of which, project cost is calculated on the basis of current annual income used for IP subject matter, by means of special factors reflecting interrelation which have developed in the market in-between property costs and level of incomes.
And according to the second, a forecast is made concerning the operational income for a certain period in the future and probability in sale price of the object at the end of this period (reversion), and then calculated and summarized current costs in all future incomes, with the use of special factor reflecting risk, which is accompanied by the capital investments in the given object.

Table 3. Cost calculated by optimistic variant (thousand rubles)