Intangible Assets

A valuation is necessary when wanting to determine the value of an intangible asset. An intangible asset lacks physical properties and represents either legal rights or competitive advantages; they can be developed or acquired by an owner. Intangible assets representing legal rights consist of copyrights, trade secrets, patents, trademarks, etc., while those representing a competitive advantage consist of knowledge activities and know-how.

Hypothetical scenarios that require an expert in business valuation:

A business owner has a patent for a new manufacturing process for a growing product. He does not have the capacity to satisfy demand for the product itself, nor can he meet the demand for the machines that utilize this new manufacturing process. He wants to sell the patent but wants to make sure that he is compensated appropriately for it. In order to accomplish that he needs to obtain a valuation for the patent by a qualified, independent appraiser.

An investor is acquiring a hospital management company that has several licenses to establish blood banks in various cities in China. The investor wants to determine how much of the purchase price should be allocated to the intangible asset of the licenses. To determine an appropriate value the investor needs to obtain a valuation from a qualified, independent appraiser.

An executive that was recently fired has a non-compete agreement with his former company. To determine what taxes will be assessed on his severance package, the non-compete agreement must be allocated a portion of the severance packages overall value. In order to have an appropriate allocation a qualified, independent appraiser should be obtained to determine the fair market value of the non-compete agreement.

Special Considerations for Intangible Asset Valuations:

When estimating the value of intangible assets it is important to recognize the volatility, ongoing creation, and problems with protection and enforcement. Appraisers must be aware of the useful life of an asset and the portion of the operating income that the asset generates.

Since every intangible asset is different, researching the specific circumstances surrounding the intangible asset is critical to determining its value. Some of the areas that need to be researched would include the type of the intangible asset, its history and development, and owner and/or operator, the licensee and/or licensor, the competitive environment and comparative intangible assets.

The nature of the intangible asset, including the type, associated legal rights and useful life, will have a significant impact on the value of the intangible asset. Ultimately, the value of the intangible asset will come down to the income producing ability or cost saving ability that it has.