Valuation of ?Intangible assets???

This Article covers the valuation aspects of Intangible assets as below, which are not Physical but provide the owners with specific rights and privileges.

·?1 Goodwill

·?2. Trademarks

·?3. Patents and copyrights

·?4. Trade secrets

·?5. Franchise and licenses

·??6. Potential activities (including unethical) that can adversely impact business.

?1 Goodwill

·?Goodwill represents the reputation, customer loyalty, and brand value a company has built over time. It arises from exceptional customer service, a strong market presence, favorable supplier relationships, or skilled employees.

·?It is reflected by the premium paid by a company for acquiring another company above its net assets ( such as property, plant & equipment, inventory, and liabilities) fair value.

Valuation of Goodwill

·?Valuing goodwill often involves the following methods:

A)The excess earnings method

? B)The market approach (comparing the value of similar businesses in the market),

C)The relief-from-royalty method (based on estimating the hypothetical royalties saved by owning the goodwill).

A)?? Excess earning method

?It is often used when significant intangible assets are considered, such as in mergers and acquisitions or when valuing a company with strong brand recognition and customer relationships.

The steps are as follows.

1. Estimating? the value of the company's net tangible assets, e.g., The book value of the assets adjusted for depreciation and impairment)

2 Calculate earnings attributable to the company's tangible assets by Multiplying the value of the net tangible assets by a fair rate of return.

3. Estimating the company's total normalized earnings on an ongoing basis (excluding unusual or non-recurring items)

4. Compute Excess earning = Normalize earning less? earning attributable to tangible assets

5 Value of goodwill & other intangible assets = Excess earning Divided by an appropriate capitalization rate

?B)?? Market approach method

The market approach method to valuing goodwill is based on the principle that the value of an asset is equal to the price that a willing buyer would pay to a willing seller. It is typically used to value goodwill in mergers and acquisitions transactions.

The steps are as follows.

(Assuming Co B is the acquiring company and Co A is Target Co)

1.?Select companies comparable to A in terms of size, operations, market

2.?Collect financial data like Earnings Before Interest, Taxes, Depreciation, and market multiples like price-to-earnings etc

3.?Determine adjustments needed to size variation growth rate, risks, etc., between A and others

4.?Estimating fair value of the target company A after adjustments

5.?Value of total Intangible? assets? = Adjusted estimated reasonable worth of A as above?? less ?tangible assets of Company A

6.?Value of Goodwill = Total value of Intangible? assets? less estimated value of other intangibles like patents,

?C)?? ?Relief from the Royalty method

This method calculates the value of goodwill by estimating the cost savings or economic benefit that a business enjoys by owning its intangible assets, such as trademarks, patents, or customer relationships, without having to pay royalties or licensing fees to a third party.

The steps are as follows.

1. Identify intangible assets for the company

2. Determine the hypothetical Royalty rate by the valuer if it did not own the intangible asset but licensed it from a third party.

3 Calculate the hypothetical Royalty costs based on the assumed Royalty rate and estimated revenue/profit generated by intangible assets

4 Determine the present value of? hypothetical Royalty cost using the appropriate discounting? rate (such as cost of Capital)

5 Value of Intangible assets= Fair market value of intangible assets Less present value of the royalty cost

The value of Goodwill can be computed by subtracting the value of other intangible assets like patents, trademarks, etc.

?2. Trademark

A company's brand value represents the recognition, reputation, and perception of a particular brand name or logo. It encompasses factors such as brand awareness, loyalty, and equity.

Trademarks safeguard brand names through distinctive signs such as logos or symbols to identify and differentiate products or services.

The useful life of a trademark as an intangible asset is far enough into the future, and hence, it is almost impractical for the management to estimate it.

Valuation of trademarks

Valuation of trademarks can be done by methods /approaches similar to the valuation of goodwill (mentioned earlier )and hence not being duplicated.

3. Patents and copyrights

Patents

Patents are exclusive rights granted by a government to protect inventions.

?Valuation of Patent

·?The valuation of patents can be challenging due to factors such as the uniqueness of the invention and its potential market value.

Negotiating the value of Patents during M&A

However, negotiating? Parameters ?during M&A are :

·?The market demand for patented technology? and the potential to generate more revenue

·?Commercial potential opportunities for future revenue streams?

·?Infringement implications on the business

Therefore, management & technical, and sales /marketing teams jointly make a well-informed decision while negotiating Patent value.

Copyrights

Copyrights provide exclusive rights for original works of authorship, such as software, literature, music, and films, thus protecting their original works.

Valuation of copyrights

Copyrights can be evaluated by methods /approaches similar to the valuation of goodwill mentioned earlier and, hence, not being duplicated.

?4. Trade secrets

?Trade secrets, such as formulas, processes, or customer lists, are confidential and valuable business information.

?Valuation of trade secrets

·?Valuation of trade secrets can be challenging due to their secretive nature.

·?Valuation methods may include the following:

·?The cost approach (based on the expenses to develop or safeguard the trade secret

·?Income approach (based on the expected economic benefits derived from the trade secret).

·?Market approach (comparing the value of similar trade secrets in the market).

?5. Franchise and licenses ?

·?A franchise is a contractual agreement that gives a company the right to operate a particular business in an area for a specific period.

Licenses are similar to franchise rights, except that government agencies typically grant them.

?Valuation of Franchise and licenses

?The most common methods are:

• Income-based approaches:?These approaches value the franchise or license based on the future cash flows that it is expected to generate
• Market-based approaches:?These approaches value the franchise or license based on the prices of similar franchises or licenses sold recently.
• Asset-based approaches:?These approaches value the franchise or license based on the underlying assets that it includes, such as trademarks, patents, and trade secrets.

?????????? Additional factors

• The exclusivity of the franchise or license
• The growth potential in the franchise or license industry
• The brand strength and reputation
• The support provided by the franchisor or licensor

·????? Economic scenario

Potential activities (including unethical) that can adversely impact business.

?Common Aspects? for Goodwill, Trademarks, Patents

i)Overstating the value due to improper or exaggerated assessments resulting in misleading financial statements.

ii)Submitting financial? reports and disclosures that are misleading

Trademarks

?? iii)Making false claims by misrepresenting the ownership rights to trademarks,

??? Misrepresenting trademark usage to enhance the perceived value of the asset.

?Trade? secrets

? ?iv)Stealing and selling secrets like customer lists, proprietary software, ???formulas, or designs to competitors or 3rd parties and obtaining kickbacks.

Patents

??v)Withholding information about patent infringement risks or disputes thus impacts the value or validity of the patent.

?vi)Making false claims by misrepresenting the ownership? rights to Patents and copyrights

?Franchise and licenses

viii) The franchise or licensee continues the use of signage/trademarks of the licensor even after the expiry of the franchise/license period and sells unauthorized products or services to innocent customers.

?ix)Selling end products by sourcing end products from spurious manufacturers.

?x)Rendering services for the licensed end products by sourcing spares that are fake or spurious by procuring these from unapproved suppliers.

?xi)Overcharging end customers beyond the prices in the license agreement or methodology prescribed in the contract.?

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