What Approaches Are Used for Valuing Intangible Assets in M&a Deals?


    What Approaches Are Used for Valuing Intangible Assets in M&a Deals?

    When it comes to the intricate process of valuing intangible assets during an M&A deal, an M&A Advisor emphasizes the importance of evaluating their contribution to revenues. Alongside expert perspectives, we've gathered additional answers that delve into various methodologies, from analyzing reproduction costs to quantifying ownership benefits. These insights offer a multifaceted approach to navigating the complexities of asset valuation in the dynamic landscape of mergers and acquisitions.

    • Evaluate Contribution to Revenues
    • Analyze Reproduction Costs
    • Compare Market Values
    • Forecast Future Income Streams
    • Assess Hypothetical License Payments
    • Quantify Ownership Benefits

    Evaluate Contribution to Revenues

    Intangible assets vary by industry, but their actual value boils down to 'What is their contribution to revenues, and can I maintain that after an acquisition?' For some industries, customer loyalty and the brand name are worth their weight in gold. For these companies, our job is to determine if and how that loyalty can be transferred to or attributed to the purchaser after a sale. However, if the loyalty lies with the owner, rather than the brand, this significantly devalues them because it is harder to pass on to a buyer. For other industries, companies hold patents, trade secrets, or unique technical capabilities that are easily transferred to new ownership, and thus maintain their value post-sale.

    I specialize in the Architecture and Engineering industries (AEC). We tend to look at the capabilities of the staff, client relationships, or even their reputation and awards. Clear and open communication is important here. For example, in client relationships, who manages those? Are these key people staying with the company after the sale? Will the client disapprove of working with the new company? These are all easily answerable questions that allow a selling company to demonstrate that 1. they bring value to the table, and 2. that it can be transferred to a buyer.

    Sara KarstetterM&A Advisor, Zweig Group

    Analyze Reproduction Costs

    The cost approach for valuing intangible assets involves analyzing what it would take to create a similar asset from scratch. It factors in all the expenses that would be necessary to reproduce the asset in question. This method takes into account the materials, labor, and any other costs associated with the creation process.

    It does not, however, account for the historical prestige or brand recognition that the asset might carry. Be sure to consider if the reproduction cost truly reflects the assets value for your specific merger or acquisition scenario.

    Compare Market Values

    Market comparison is a valuation method that looks at how much similar assets are worth in the current market. It entails studying the sales of comparable intangible assets and determining a value based on these comparisons. It's akin to understanding how much a house might be worth by looking at similar homes in the same neighborhood.

    This approach gives a real-world context to the value of intangible assets by linking them to market realities. Think about how similar assets in the market can help you gauge the worth of the intangible asset you're interested in.

    Forecast Future Income Streams

    Using the income approach to value intangible assets requires calculating the net present value of expected future income streams that the asset will generate. This method forecasts the revenue that the asset will likely produce and then discounts that amount back to its present value. It is akin to deducing what future money is worth today, considering risks and the time value of money.

    The underlying principle is that an asset's worth is tied to its potential to create cash flow. Evaluate if the future earnings of your intangible asset could be a reliable indicator of its current value.

    Assess Hypothetical License Payments

    The royalty relief method looks at intangible assets through the lens of hypothetical license payments that a company avoids by owning the asset. It calculates what a company would have to pay if it had to license the intangible asset from someone else. The avoided cost is then used as a basis for the value of the asset.

    This offers a practical outlook on what the asset could cost in a real-world situation, where licensing is common. If you're assessing the value of an asset, think about the advantage of owning it rather than paying for its use.

    Quantify Ownership Benefits

    Relief-from-royalty examines the savings a company incurs by holding an asset that it would otherwise have to license or pay royalties for. This method quantifies the benefits of ownership versus the recurrent expense of licensing. It reflects the tangible financial advantage that owning the asset directly provides to its holder.

    The approach looks at the cost savings over time and translates them into the asset's value. Consider how your company's savings from owning an intangible asset can reflect its worth.