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Beyond the Balance Sheet: How to Identify and Value Intangible Assets

March 6, 2024

Unlike tangible assets or assets that can be found directly on a company’s balance sheet, off-balance sheet intangible assets are sometimes tricky to identify, and even more difficult to value. Despite their less apparent nature, these assets are crucial for the successful operation of your business. Recognizing the significance of intangible assets and how a professional would calculate their worth is the first step towards leveraging them to your advantage.

Examples of Intangible Assets

Intangible assets encompass a wide range of non-physical assets that are pivotal to a company’s competitive edge. These include, but are not limited to, technology and know-how, patents, brand names, customer relationships, non-compete agreements, assembled workforce, and goodwill.

Identifying Intangible Assets

The best way to identify these assets is to ask key questions. Consider the following to uncover the intangible assets within your company:

  • Technology, Know-how, and Patents: Does the company own any proprietary IP or patents? Are the processes highly technical requiring many years of experience to reproduce? Have the processes been developed over many years through trial and error?
  • Brand Names: Does the company have a well-established and well-recognized brand name? Do customers associate the company’s product or service with the brand or are they shopping around for the cheapest and/or most convenient option on the market?
  • Customer Relationships: Does the company have a strong and recurring customer base? What does the churn rate look like?
  • Non-compete Agreements: Is there a non-compete agreement in place? Would the business be significantly impacted if the key employees were to leave and compete?
  • Assembled Workforce: Are the processes highly technical requiring a skilled and knowledgeable workforce? Can the employees be easily replaced? How long does it take for a new employee to ramp up to 100% efficiency?
  • Goodwill: Is there a strong and reputable management team in place? Does the company have strong relationships with its lenders and suppliers? Does the company have a skilled workforce and good employee relations?

Valuing Intangible Assets

Valuing intangible assets is a sophisticated process that often requires the expertise of a Chartered Business Valuator (CBV) who can perform a professional business valuation. Although this is a highly complex and technical exercise, it’s important to understand the logic and rationale behind each approach.

The Cost Approach

This approach is premised on the idea that a prudent investor will pay no more than the cost to obtain an asset of identical utility, either through purchase or construction. It establishes fair value based on the cost to reproduce or replace the subject asset, considering the time, materials, and knowledge needed to do so. This approach may be appropriate in situations where highly substitutable assets can be developed in-house or purchased from a third party, and in situations where future expected cash flows from the subject asset have not been established.

The Relief from Royalty (RFR) Method

The RFR method estimates the royalties saved by owning the asset rather than licensing it. This method is commonly used to value trademarks/trade names and technology assets.

The Multi-Period Excess Earnings Method (MEEM)

The MEEM seeks to isolate excess cash flows of a business that are specifically attributable to the subject intangible asset. This method is best suited for when there is only one key intangible asset in the business.

The With and Without Approach

This approach compares two scenarios: the business’s overall cash flows generated from all existing assets, with the subject intangible asset, and the business’s overall cash flows generated from all existing assets, without the subject intangible asset. The difference between these two scenarios is attributable to the subject intangible asset. This approach is commonly used to value non-compete agreements, franchise agreements, and licenses.

Below are some of the common approaches and methodologies applied to different intangible assets:

  • Technology, Know-how, and Patents: Cost approach, RFR method, and/or MEEM
  • Brand Names: RFR method
  • Customer Relationships: MEEM
  • Non-compete Agreements: With and without approach
  • Assembled Workforce: Cost approach
  • Goodwill: There is no direct valuation approach or methodology for valuing goodwill. Instead, it is calculated by difference. For more insights on what exactly is goodwill and how it is calculated, refer to our business valuations FAQs article.

The valuation of intangible assets requires a blend of experience and specialized knowledge. Our team at DMCL, equipped with seasoned CBVs, is ready to help you uncover the intangible assets that define your business’s unique value proposition. If you need more information or are contemplating a business valuation for your organization, reach out to one of our DMCL advisors and they’ll be happy to help you in uncovering and valuing the intangible assets that define your business’s unique value proposition.

Article written by Chris Riccio, CPA, CBV