What are the best practices for valuing a company's intangible assets?

1 Identify the relevant intangible assets

The first step in valuing intangible assets is to identify which ones are relevant for the company and its industry. Not all intangible assets are equal in importance or value, and some may not be recognized as such by accounting standards. For example, a pharmaceutical company may have a valuable patent portfolio, while a software firm may depend more on its brand name and customer base. To determine the applicable intangible assets, you should consider factors such as the nature and purpose of the asset, legal and contractual rights and obligations related to it, and economic benefits and risks associated with it. Additionally, you should take into account how much the intangible asset contributes to cash flows, profitability, and growth potential. Also, you should assess how sensitive the asset is to market conditions, technological changes, and regulatory developments.

2 Choose an appropriate valuation method

The second step in valuing intangible assets is to choose an appropriate valuation method that reflects the characteristics and expectations of the intangible asset. Income-based, market-based, and cost-based methods are the three main types of valuation methods, each with its own advantages and disadvantages. The most common income-based methods involve the discounted cash flow (DCF) method, relief from royalty method, and excess earnings method. Market-based methods compare the value of the intangible asset with similar or comparable assets that have been sold or licensed in the market. Cost-based methods estimate the value of the intangible asset based on the cost of creating, acquiring, or replacing it; these include the historical cost method and replacement cost method. Ultimately, choosing an appropriate valuation method depends on data availability and reliability, degree of subjectivity and uncertainty, and assumptions and projections involved.

3 Apply the valuation method consistently and transparently

The third step in valuing intangible assets is to apply the chosen valuation method consistently and transparently, following the standards and guidelines of the relevant accounting and valuation authorities. It should be based on reasonable and supportable assumptions, data, and calculations, and should be documented and disclosed in a clear and comprehensive manner. Additionally, the application of the valuation method should be reviewed and updated periodically to reflect any changes in economic conditions, market expectations, or performance of the intangible asset. To ensure accuracy, it is best practice to use multiple valuation methods or approaches to cross-check and validate the results, as well as reliable sources of data and information such as financial statements, market reports, industry benchmarks, and expert opinions. Furthermore, adjustments should be made for any factors that may affect its realizability or transferability such as taxes, legal fees, or contractual obligations. Additionally, sensitivity and scenario analysis should be performed to test the impact of changes in key assumptions or variables on the value of the intangible asset. Finally, it is important to report and explain the valuation method, assumptions, data, calculations, and results in a transparent and understandable way to enhance credibility and reliability of the valuation.

4 Evaluate the valuation results and implications

The fourth step in valuing intangible assets is to evaluate the valuation results and implications, and to use them for decision-making and communication purposes. It’s important to compare and contrast the results with the objectives and expectations of the valuation, as well as with the values and performance of other assets and companies. Additionally, these results should be used to inform and influence the strategic and operational decisions of the company. To ensure accuracy, best practices include assessing the strengths and weaknesses of the valuation, analyzing the drivers and components of the value, monitoring and measuring performance over time, and communicating the results to relevant stakeholders. By doing so, you can explain the rationale and benefits of the valuation.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?