Intangible assets are some of the most difficult items to value. However, the process of valuing intangible assets is a crucial step in determining purchase price allocations when buying and selling a business.
Intangible assets, unlike tangible assets, have no physical existence. However, they still retain a description, the ability of being destroyed or terminated, and they derive most of their worth from expected future benefits. Determining the proportion of intangibles to tangibles is a good indicator of whether or not a business is service-oriented or commodity-oriented.
Several methods can be employed to appropriately value an intangible asset.
- The Cost Approach – This approach evaluates the total of all expenses incurred to create the intangible asset. Two important driving factors in this cost are the useful life of the asset, and the obsolescence.
- The Market Approach – In order to use this method, the appraiser must find data concerning intangible assets which have been purchased. Most often it is difficult to find relevant transaction data as these types of sales are rarely published. As a result, people generally utilize some form of royalty method in the income approach.
- The Income Approach – This approach uses the following methods: discounted cash flow, relief from royalty, and capitalized excess earnings. In addition to using these methods, the appraiser must determine a discount rate for the intangible. The discount rate operates as a function of the duration of an intangible, as well as the loss rate of the typical customer or obsolescence of a product.
Discounted Cash Flow Approach – This approach requires that all variables and growth rates must be projected for future years. In addition, the appraiser must calculate the duration of the income stream and discount this cash flow at the intangible discount rate. This method can also utilize a royalty rate.
Frazier Capital Valuation has experience valuing a multitude of various intangible assets including patents, copyrights, trademarks, and others. Click here for more information about having Frazier Capital Valuation appraise your intangibles.