Intangible assets are assets without physical substance that provide rights or economic benefits to their owners.
Intangible assets include goodwill, intellectual property, marketing related assets (such as trademarks, trade names and internet domain names), customer related assets (such as customer lists, customer contracts and customer relationships), artistic assets, contractual assets and technology assets.
Why May You Need to Value an Intangible Asset?
There are a number of reasons why intangible assets may need to be valued, including but not limited to:
- For financial reporting reasons, particularly as part of business combinations, impairment analysis and business acquisitions;
- For tax reporting purposes, particularly when such assets are transacted between related parties;
- For litigation, including shareholder disputes, estate litigation and family law matters, or;
- For lending requirements when such assets are used as collateral.
Common Intangible Asset Approaches and Methods
There are a number of approaches and methods which can be applied to the valuation of intangible assets. The approach applied to particular engagements is often prescribed by legal or regulatory requirements associated with the specific purpose of the valuation, hence it is important to seek out expert advice as to what approach should be applied for each particular matter.
Some of the common approaches and methods applied to the valuation of intangible assets include:
- Market Approaches: The primary market approach is the guideline transactions method, however there are often significant challenges in applying this method owing to the limited market information available regarding the transaction of intangible assets.
- The Excess Earnings Method (an income approach): This method applies a value to intangible assets after excluding the proportion of cash flows attributable to other assets which are required to generate those cash flows. For example, if an intangible asset is one component of a broader business, this method would require that the cash flows only directly derived by virtue of the business holding the intangible assets be identified and used as the basis for conducting a valuation calculation.
- Relief-from-Royalty Method (an income approach): This is a particularly common method, whereby the value of an intangible asset is determined with reference to the value of the hypothetical royalty payments that would be saved by owning the assets instead of licensing the asset.
- Cost Approach: Under the cost approach method, the value of an intangible asset is determined with reference to the replacement cost of a similar asset.
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Groves & Partners are expert business transaction advisors and valuers, with significant experience in valuing intangible assets.