Understanding Intangible Assets
Intangible assets are non-physical assets that are distinct from physical assets like office space, cars, and equipment. A company’s intangible assets include:
- Brand, including brand name, logo or symbol, and company reputation
- Goodwill
- Intellectual Property, including patents, licenses, copyrights, trademarks, trade secrets, franchises, digital assets, contracts, and agreements
Tangible vs Intangible Assets
Unlike physical assets, like cars, for example, intangible assets do not have an easily defined value. However, it is essential to properly assess the value of a business’s intangible assets, as their value can significantly impact the company’s overall value.
Determining Finite vs. Infinite Intangible Assets
Whether an asset’s lifespan is finite or infinite has a direct impact on it’s value and how that value is factored into the overall value of the company. Intangible assests related to a company’s brand and goodwill are considered as having an infinite lifespan i.e. they hold value forever. In contrast, a company’s intellectual property assets are finite, as they have a legally defined expiration date after which they do not retain legal exclusivity or value.
The Importance of Valuing Intangible Assets
Valuing intangible assets properly is vitally important for accurate financial reporting and business valuation purposes. While physical assets such as property and equipment are relatively easy to assess and value, the value of intangible assets such as brand reputation, intellectual property, and customer relationships is often more challenging to determine.
Without properly valuing these intangible assets, it is impossible to accurately capture the full value of a business. Inaccurate estimations in valuing intangible assets can have significant implications, potentially translating into millions of dollars of impact for companies in tax obligations, lost funding, investment, or sale opportunities, among others.
Furthermore, in litigation cases centered around intellectual property infringements, an accurate valuation is key to pursuing justice and reaching accurate damage calculations.
At AVGI, we understand the critical importance of accurately valuing intangible assets. With over 30+ years of experience, we specialize in providing empirical and reliable valuations of intangible assets for businesses across various industries. Our expertise and proven track record make us the trusted partner for companies seeking to gain a thorough understanding of the true value of their intangible assets.
Challenges in Valuing Intangible Assets
Valuing intangible assets poses several challenges. One major challenge is that intangible assets are inherently more difficult to quantify than tangible assets. There is no set price tag or for intangible assets like a brand name, which makes valuating intangible assets a complex process. Some other difficulties include determining the useful life of intangible assets, assessing market demand for these assets, and accurately measuring their contribution to the company’s overall value.
Methods for Valuing Intangible Assets
Like other instances in business valuation, there are 3 main approaches to determining the value of an intangible asset. At AVGI, we generally employ all 3 methods and then weight them logically to reach an accurate and empirical valuation.
Cost Approach
When employing the cost approach to valuing intangible assets, one follows a standard method by determining the cost required to recreate or replace the assets. This involves considering the expenses incurred in developing, acquiring, or maintaining the assets. By doing so, the cost approach provides a solid foundation for valuing intangibles.
To further illustrate, let’s consider the example of a software company. If the company has developed a proprietary software program, the cost approach would involve evaluating the expenses incurred in the development of the software, including research and development costs, labor costs, and any other direct expenses. Additionally, it would consider the cost that would be required to recreate or replace the software program, taking into account the current market conditions and technological advancements. This approach provides a clear and tangible way to assess the value of the intangible asset.It is commonly utilized in the valuation of assets such as patents, copyrights, and customer lists.
In practical terms, this approach involves forecasting the future economic benefits derived from the intangible asset and then discounting these expected future cash flows to their present value. By doing so, a monetary value for the intangible asset can be determined.
For example, a software company may use the income approach to value its internally developed software. The company would estimate the future cash flows expected to be generated by the software and then discount these cash flows to their present value. This would provide an indication of the value of the software to the company, considering the income it is anticipated to generate over time.
Market Approach
When employing the market approach to value intangible assets, the focus is on determining the value of the asset by comparing it to similar assets that have been sold in the marketplace. This method assesses the value of the intangible asset by analyzing the prices at which similar assets have been bought or sold.
The market approach involves researching and analyzing comparable transactions involving similar intangible assets. This might include looking at sales of similar patents, copyrights, or customer lists to derive a fair market value for the intangible asset in question.
For example, if a technology company is looking to value its proprietary software using the market approach, it would examine the sale prices of similar software assets in the industry. By analyzing recent transactions involving comparable software, the company can arrive at a reasonable estimate of the market value of its own software.
The market approach provides valuable insights by leveraging real-world transaction data to determine the value of intangible assets, making it a useful method for understanding the market value of such assets.
Hybrid Approaches
Hybrid approaches use the strengths of different methods to mitigate their limitations and provide a more comprehensive valuation. At AVGI, we employ standard valuation methodology along with a unique approach to ensure accurate and empirical results for intangible asset valuation. Hybrid approaches, which utilize the strengths of different methods to overcome their limitations and provide a more comprehensive valuation, align with our approach. For instance, combining the income approach with qualitative assessments to value a software product is an example of a hybrid method that we integrate into our valuation process. By embracing hybrid approaches, we aim to provide more well-rounded and robust valuations that accurately reflect the true value of intangible assets.
Valuing Intangible Assets: The Bottom Line
Valuing intangible assets is crucial for accurate financial reporting and business valuations, as they can significantly impact a company’s overall value. Intangible assets such as brand reputation and intellectual property are challenging to quantify and attach a price tag to, making their valuation a complex process. The cost approach, income approach, and market approach are the three main methods used to determine the value of intangible assets, with each providing unique insights into their worth. Does your company need an intangible asset valued? Give us a call for a free consultation with zero commitment. Our intangible asset experts look forward to serving you.
