Royalty Avoidance Approach

One method to determine the market value of Intellectual Property assets like patents, trademarks, and copyrights is to use the royalty avoidance approach (also known as Relief from royalty or Royalty Relief). This approach determines the value of Intellectual Property assets by estimating what it would cost the business if it had to purchase the Intellectual Property (IP) it uses from an outsider.

This approach requires the valuator to (1) project future sales of the products that use the technology, (2) determine an appropriate reasonable royalty rate, and (3) determine either a present value factor or an appropriate discount rate. The result is the present value of the Intellectual Property to the company. See the following example of Read more

IFRS 13 Asset accumulation method

The asset accumulation method and the adjusted net asset method are both generally accepted business valuation methods of the asset-based business valuation approach.

The asset accumulation method is well suited for business and security valuations performed for transaction, taxation, and controversy purposes. All business valuation approaches and methods can indicate the defined value of the subject business entity. IFRS 13 Asset accumulation method

In addition, the asset accumulation method also helps to explain the concluded value—by specifically identifying the value impact of each category of the subject entity assets and liabilities.

This informational content of the asset accumulation method is particularly useful in a transaction, taxation, or controversy context when the particular analysis is used to identify:

  1. which asset
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Common Elements of Customer Relationships

When determining if a customer relationship asset exists, one should consider several elements that create that intangible asset.

Required Information

For a customer relationship asset to exist, it should have an informational component or factual information about the customer that is important and useful to the company.

This information may include such attributes as name, address, telephone number, email address, social security number, customer account number, credit rating, insurance information, or other third-party payer information. It may also include account information, date of first and last purchase, accounts receivable balance, trends, the amounts purchased (last year, greatest, etc.), customer payment record, and other account information.

Further, the informational element may include information relating to the customer’s purchase preferences, frequency, seasonality, Read more

Valuation of Intangibles on Acquisition

THE CASE: Shockwave Corporation

  • Shockwave Corporation is the largest satellite radio provider in the country. Shockwave commenced operations five years ago when the government granted satellite spectrum licenses to four start-ups seeking to cultivate a then-burgeoning industry. Since that time, precipitated by the accelerating wireless data needs of telecommunication industry technology, the government has stated that it will not be licensing any new spectrum for satellite radio but may approve the sale or transfer of existing spectrum.
  • Shockwave generates its revenue from monthly subscriptions to consumers sourced via a direct retail sales channel (i.e. direct mail, print and television advertisements, billboards, and retail in-store kiosks).
  • Shockwave does not manufacture the satellite radio receivers used by consumers but transmits signals that
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Calculating the value of an acquisition

This is a detailed example of calculating the fair value of an acquisition, using a logical step by step approach and realistic assumptions and determinations based on transaction and market data. Identifying and valuing intangible asset(s) is a broad endeavor and requires careful consideration of; factors specific to each business, the transaction structure, identifying the primary income generating asset, determining the discount rates, estimating the useful lives for identified intangibles. Examples of such intangibles include customer contracts, trademarks, brands, etc.

 

The DealFortune, Inc. acquired M&P Company on January 1, 2017. Consideration was $30 million cash plus additional contingent consideration, as follows:

EBITDA

  • Below 1 million: Nil
  • 1.5 – 2.0 million: 2 million
  • 2.0
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Intangible valuation approach

Valuation assignments must estimate the value of intangibles, recognising the volatility, on-going creation and problems with protection and enforcement. Business valuation analysts have been independently valuing intangible assets for many years, usually in the context of an exchange between owners (transaction), for estate and gift tax purposes or as part of a litigation assignment. Knowledge underlies the creation of value. Some of the questions that need to be answered include the following:

  • What would a willing buyer pay to employ the intangible asset?
  • What is the useful life of this asset?
  • What portion of the operating income does this asset generate?

Financial reporting concepts require measurement of these separable intangible assets from the overall goodwill in a purchase price Read more