Business Management:
Valuation of Intangible Assets

You would not mind paying a fortune for a Mercedes or a Versace suit. What you are paying for is not just good quality but the brand name and the image associated with it. A strong brand name ensures that high prices can be charged and thus has a major role in the profitability and value of a company. How does one quantify or capture the value of brand and other intangible assets?

The most commonly valued intangible assets include know-how, patents for products, tools, or processes, trademarks, brands, copyrights for software and process documentation, and publishing rights for books, films, and music.Valuation of intangible assets focuses on the additional profits or reduction in costs that they contribute to. Let us discuss the principal methods briefly.

Income Approach
This method arrives at the value of an intangible asset by comparing the value of a company that does not have the asset. The additional profits are attributed to the value of the intangible asset. The calculated profits expected to be earned over the life of the asset are then discounted to the present day to arrive at a value for the asset. While using this method, you should make sure that the additional profits are not due to some other factors, such as higher efficiency rate. Such factors would then have to be accounted for before arriving at the value of the asset. Similarly, you should also account for intangible assets or additional returns of the company that you are comparing with.

Another variation of this method is based on the higher prices of brands. The revenue of a branded and an unbranded company are compared. The marketing and other brand support costs incurred are subtracted from this additional revenue. This value discounted to the present day provides a value for the brand. The reduction in business expenses or cost due to the introduction of an intangible asset, such as a tool or a new process is also an indicator for using this approach. This method is used to calculate the present value of the reduction in cost. This calculated value is the value of the intangible asset.

Market Approach
This method arrives at the value of an intangible asset by comparing it with the sales of similar assets. Market attributes, such as sales EBIT, and price of the similar asset are used to derive market multiples. However, using this approach can be difficult as it is difficult to find an asset that is similar to the asset in question.

Cost Approach
This approach determines the value of an intangible asset from the price that an investor would pay to reproduce, develop, or replace the asset. This price takes into account all the expenditure incurred in developing the asset. It does not take into account any revenue or profit that its owner gets.

The valuation of intellectual property and intangible assets is not simple but important. It is also crucial for managing and maintaining intangible assets financially. This can only be done when a proper valuation is done based on the contribution of the asset to the business. Performing a valuation not only helps you identify the value of the asset but also maintain and increase the performance or value of the asset. By valuating your assets, you make your business lucrative to investors. Perhaps the most important role of valuation is in the scenario where a firm is entering a merger or an acquisition.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.