Intangible Asset Valauations
Intangible assets are a critical consideration when determining damages in an infringement case, negotiating a property settlement, valuing a company for conversion or sale, and quantifying a charitable donation. Despite their many applications, intangible assets are often underestimated or overlooked in the valuation process, particularly when they are non-revenue generating assets.
It is important to remember that because an asset does not generate revenue does not mean it is not valuable. Copyrights, internet domain names, goodwill, computer software, proprietary lists, existing contracts, patents and trademarks are all examples of intangible assets that add tremendous value even if they do not actively generate revenue.
Valuing intangible assets is not a straightforward task. They can be difficult to define and there is not a finite approach to the process of determining their value– that is to say there are many generally-accepted methods. For this reason, it is important to choose a skillful and experienced valuation professional who is able to identify the proper methods of determining the value of the intangible assets at question.
To determine value, most valuation professionals will begin by assessing the industry and market in which the asset will be used. Market size, as well as current and projected economic conditions of a particular market can have a significant influence on the growth potential of a company and its assets.
Next, they will determine an asset’s benefit base, which is the potential income and revenue an asset is projected to accrue throughout its projected useful life. In order to do this, a valuator could use a company’s real expenses alongside generally accepted accounting principles to determine economic income. Looking at expected operational income, royalty rates, cost savings and/or excess income associated with the use of the asset are also useful ways to determine the economic return an asset is likely to generate.
After gathering this information, a valuator will then discount the expected benefits of an asset by an appropriate rate of return, taking risks associated with returns into considering.
It is worthwhile to note that when it comes to patents, the IRS recognizes the income that can be attributed to the asset or its application, its safe rate at the time of valuation, and its reasonable, speculative capitalization rate as determined by the IRS, as acceptable means of determining the patent’s value.
While the process of valuing intangible assets does not have a standard method or approach, an experienced valuator recognizes their importance in the valuation process and will develop an approach that ensures the full value of these assets is considered.