Valuing Intangible Assets Using the Market Approach – Comparative Analysis of Alternative Data Sources
Whenever an appraiser choses to apply a market approach, he or she has to establish comparability between observable market transactions and the valuation object. First level of comparability is close proximity of the business model, customer needs and customer benefits.
In the valuation of intangible assets, the relief from royalty method (RFRM) is the prevalent market approach. It requires the selection of comparable transactions involving the sale and/or licensing of a comparable intangible asset. The RFRM method is often criticized for the limited selection of observable market transactions, and for the difficulties in identifying comparable transactions.
Since 1997, data vendors have been providing access to license agreements which are filed as exhibits in the SEC database as ?material contracts“ according to Item 601(b)(10) of the Securities Act and Exchange Act. Various databases collect, populate and categorize such license agreements from the SEC database. It is the oldest and most popular source for market transactions and royalty rates related to intangible assets.
Since 2014, MARKABLES is an alternative data provider. MARKABLES provides access to intangible asset value data being part of corporate transactions (M&A). Such data on acquired intangible assets has to be reported in financial statements of listed companies since the adoption of IFRS / IAS back in 2004. MARKABLES claims to offer a broader selection of relevant cases, and to substantially improve comparability of observable market transactions for intangible assets.
Now, what are the differences between the traditional data sources – license agreements filed with the SEC – and the alternative data source used by MARKABLES – data on acquired intangibe assets in business combinations?
Below, we present three comparative case studies to demonstrate the difference in selection and results. All three case studies relate to the valuation of a trademark which is based on observable license agreements and peer group analysis, and which was published in the public domain. We juxtapose evidence ?as if“ the peer group and royalty rate analysis had been based on MARKABLES data.
Case 1: The underwear trademark
In 2012, Israel based Delta Galil Industries Ltd. acquired Schiesser AG, a traditional German underwear and lingerie business founded in 1875. For the accounting of the acquisition, the acquired trademarks had to be valued and recognized. The valuator adopted a market approach (RFRM) and selected seven comparable license transactions. The valuation report was disclosed by Delta Galil in the context of purchase accounting.
We assume that the appraiser searched principally for underwear businesses. However, none of the seven cases involves a pure-play underwear business. While some of the license agreements might include underwear as a permitted product, their focus is still largely on apparel. Typically, suppliers of underwear and lingerie (innerwear) are separate from suppliers of outerwear. Sometimes, underwear is combined with socks and/or hosiery. Obviously, the identified comparable license transactions helped little to determine an appropriate royalty rate. The valuator concluded on a a pre-tax royalty rate of 2.6%, far below the median range found in the peer group.
In contrast, the MARKABLES database offers a much more specific selection within the underwear category, including
A peer group dataset of 12 underwear cases listed in MARKABLES finds
Trademark is the most important asset in this sector. Still, royalty rates are below the level in the apparel and fashion segment. It is obvious from the sample that sales multiples at enterprise level are rather low in this sector, on average less than 1.0x, reflecting moderate profitability and growth rates.
The findings from MARKABLES are – on average - substantially lower (-33%) than from license agreements. And they are closer to the royalty rate conclusion in the Schiesser case.
Case 2: Trademark for windows and doors
Jeld-Wen is a leading global manufacturer of windows and doors, originally founded in Oregon and today operating from 120 manufacturing facilities in 19 countries. During the 90s, Jeld-Wen launchd internationally in Canada, Europe and Australia. Today, products are marketed globally under the JELD-WEN? brand, along with several market-leading regional brands such as Swedoor? and DANA? in Europe and Corinthian?, Stegbar?, and Trend? in Australia.
For transfer pricing purposes, Jeld-Wen had to determine the appropriate royalty rate for the use of its brand names by subsidiaries in Canada and Europe. The royalty rate analysis was disclosed as (anonymized) case study in the valuation textbook ?Guide to Intangible Asset Valuation, 2014“ by Robert Reilly and Robert Schweihs, on page 492 (the ?Omicron“ case study).
According to the authors,?the appraiser made a search in different license agreement databases and finally selected four comparable transactions. None of the four cases is anywhere close to a brand name used for windows and doors, even not for construction products in general. The selection seems to be random and illustrates the problems of the valuator to identify sufficiently similar market transactions.
The median royalty rate in the peer group of four was 3.0%. The appraiser finally determined an arm’s length royalty rate of 2.5% for the use of the brand name in Canada, and 1.5% for European countries. Based on the limited comparability, the royalty rate determination seems to have little substance.
Having a look into the MARKABLES database, we find as many as 37 (!) specialised manufacturers of windows and/or doors (and their brand names).?This makes both a large and specific selection of comparable data. The median royalty rate is 1.9%, the interquartile range is from 1.1% to 3.1%, and the maximum range goes from 0.3% to 5.5%.
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Again, these rates are approximately one third lower compared to the (basically incomparable) license agreement sample above. They support the royalty rate conclusion in the Jeld-Wen case in principle.
The MARKABLES dataset reveals another most relevant correlation: between royalty rates and profitability. As the chart demonstrates, royalty rates increase proportionally with increasing profitability.
Case 3: Trademark in online retailing
All of us know Amazon.?Initially an online marketplace for books, it has expanded into a multitude of product categories. Also, we must not forget that Amazon’s brand positioning was based not only on convenience, but primarily on low-price.
In 2005, Amazon transferred the ownership in its European trademarks and some technology to a European subsidiary based in Luxembourg. Some years later, the Internal Revenue Service (IRS) disputed the taxable value of the transfer as put forward by Amazon, and the matter was finally decided at the United Tax Court in 2017. Regarding the trademark element in this dispute, it must be considered as a landmark case in trademark litigation.
The case has been unfolded in documents released by the court, and by a journalist network called DocumentCloud. IRS had calculated the taxable value of the transferred trademarks at $ 3.125 million. Amazon in turn offered a value between $ 252 and $ 312 million. Both parties relied on valuation experts, and both parties suggested the royalty relief method and contributed a different set of what they said to be comparable trademark license transactions to determine the value oft he trademark. Amazon concluded on an appropriate royalty rate of 0.59%, IRS on 2%.
The judge asked each party which license agreement introduced by the other party they could accept. With this approach, the judge identified four agreements in the middle of the table that were mutually accepted as comparable to Amazon. From there, he concluded wisely on a reasonable royalty rate of 1.0%. Fair enough and smart, considering the license agreements brought forward by the parties.
However, considering the nature and characteristics of Amazon’s business, the selection of observable license agreements is more than questionable.
The MARKABLES database provides a broad selection of different cases in the relevant areas:
A royalty rate analysis supports the above assumptions; brand has a slightly higher importance for online retailers, resulting in slightly higher royalty rates. Both aspects equally weighted (low-price store-based, and online), the resulting mean royalty rates come very close to the royalty rate conclusion made by the judge in the Amazon case.
The MARKABLES dataset however reveals another, most relevant detail for this case: useful life. The parties largely disagreed about the useful life of the transferred trademarks. Amazon’s experts proposed a useful life of between 8 and 20 years, while IRS expert proposed an indefinite/perpetual life. The judge finally concluded on a reasonable useful life of 20 years. According to the evidence from MARKABLES , useful life is considerably shorter for online retail brands, with less than 10 years on average.
Synopsis
MARKABLES data excels license agreement data in many different aspects:
(1)????MARKABLES offers a 5x to 12x times larger selection
(2)????Level of sector or product comparability is far superior
(3)????Median and interquartile royalty rates ?to the point“
(4)????Additional datapoints allow for various cross-checks, outlier and regression analysis
Therefore, MARKABLES data might be the better alternative to consider in the market approach for intangible assets.
As of late November 2022, MARKABLES has close to 40,000 different intangible assets and their value related data on file for trademarks/brand names, customer relations, technology, software, and goodwill. The database is constantly updated and grows by 3,500 to 4,000 items annually.