Valuation of intangible assets
Why should I value the intangible assets? Because they often account for a very large part of a company's value. Therefore, there may be many reasons to evaluate them.
Many companies do not understand that their trademarks, designs and other intangible property rights and assets are often more valuable than, for example, their inventories. It is not uncommon for a company’s intangible assets to be their single most valuable asset and can be used to ensure financing of the company's growth.
For example, a valuation may become necessary when:
- You plan to license out an intangible asset and you want to get an estimate of future license fees
- You plan to buy or sell a business. A valuation of the intangible assets can then be helpful in achieving a better price.
- There may also be an obligation to value the intangible assets vis-à-vis the Swedish Tax Agency. Read also the section on accounting below.
Valuing the intangible
Getting an accurate valuation of your intangible assets is not always easy. How much is a trademark worth after years of marketing? Does your patent protect a technical solution where there is a good market basis or is the invention superfluous? A well-known trademark or a strong patent can be the true core of a company.
All intangible assets are not valuable? If they do not help to create, maintain, or increase cash flow, they may not have direct value. The value of your assets may also change over time. For example, a patent can protect a unique solution, but after some time other solutions may arise that reduce the value of your patent.
Trademarks generally increase in value the more well-known they become.
The value of intangible property rights depends on the circumstances of a given time and place. It is important to analyse the intangible property right on the basis of its use, the market and competitors.
The valuation of intangible property rights is very important. A valuation indicates whether a right is necessary or not. It also enables the holder to develop a coherent strategy and the valuation points to the purpose of the intangible property right.
Different valuation methods
There are different methods to value your intangible assets. All methods have their advantages and disadvantages and it is difficult to find a method that is universal and works in all situations. You yourself need to decide which method suits your company. There are players in the market who sell valuation services and who can help you with how to get the most reliable valuation possible.
The Cost method
A valuation according to this method is based on the costs required to create an intangible asset, or what it might cost to recreate or develop a similar product or service. The method does not take into account the current economic value of a product.
Common costs tend to be:
- Materials and equipment
- Research and development
- Development of prototype
- Regulatory approval and certification for, for example, drugs
- Application and registration and granting of intangible property rights
This method assumes that a potential buyer can avoid these costs by purchasing the intangible asset. Valuable advantages to this can be:
Time: By purchasing the asset, the buyer can avoid wasting time on research and development.
Expenses: Should the buyer instead try to develop their own technology, the buyer would need to spend at least this much.
Success: A buyer may not have succeeded in developing their own technology.
Protection: A buyer may not be able to protect their own technology and may also risk infringing on the rights of others.
This valuation method is suitable for an overall valuation when buying a business and the considerations of the assets at an early stage. However, the focus on costs instead of profit can create a skewed picture so that the market potential is not fully weighed in. This method does not take into account future value and therefore a parameter on which valuation is traditionally based is lost.
The Market Value method
Basing the valuation of a product on the basis of its performance on the market can be a good approach when valuing intangible assets and rights. Market valuation of intangible assets provides a good estimate of the value. The problem with this method is that it can be difficult to find published information on transfers of intangible property and rights, as they are often confidential. There are few transfers that are similar enough to provide a good comparison. No transfer is the same.
It is unlikely that this method would be used to evaluate patents. The value of a patent is largely based on the uniqueness of the patent and therefore comparable information is unlikely to be found.
Despite the difficulties, this method is objective and can provide companies with a realistic analysis of the value of an intangible asset for both the holder and the buyer.
The Income or Economic Benefit method
This method focuses on the income that an intangible asset may generate in the future. The method takes into account both future income, which the right can generate during its lifetime, as well as the costs of this. Risk and financial costs are also factors that have an impact. The result of this analysis is called "Net Present Value" or NPV.
This method of valuing intangible assets gives a potential buyer the opportunity to consider an investment based on whether the NPV valuation is positive or negative.
However, although NPV is a useful and easy-to-use approach, it should be noted that the Income or Economic Benefit method is only an assessment of likely future events rather than actual outcomes.
Difficulties with this method are the following:
- It is difficult to estimate the economic life cycle of intangible assets.
- It is difficult to estimate income for years to come.
- Factors such as the strength of the intangible asset, the size of the potential market, competition, changes in the economic climate and the cost of registration and defending oneself against infringements of the right must be taken into account.
Value trademark with ISO 10668
There is a method called ISO 10668, which is a standard for performing a so-called trademark valuation. In the United States, among other countries, the registered trademark right and how the general public perceives a company’s trademark as a whole (brand). This standard therefore does not necessarily refer to a specific registered trademark right, but rather the trademark as a whole.
The standard is often used to perform a valuation for strategy work, accounting, transfers, licensing and more.
Accounting of intangible assets
Under accounting law, an intangible asset is defined as a non-monetary asset without a physical form. Whether and how an intangible asset is to be accounted for depends to a large extent on whether the asset is acquired or self-processed and what norm the entity follows. Therefore, check carefully with, for example, the Swedish Tax Agency what rules apply to your business.
In general, however, it can be said that an intangible fixed asset may be included in the balance sheet under the rules regardless of whether the asset is acquired from someone else or is self-processed (Chapter 4). The Annual Accounts Act). However, a prerequisite is that the expenses for the asset is of significant value to the business in the coming years.
An intangible fixed asset shall be recognised at its acquisition value, i.e. the expenses for acquiring or manufacturing the asset. The acquisition value of a self-processed (manufactured) intangible fixed asset may include:
- costs directly attributable to the production of the asset;
- a fair share of indirect manufacturing costs;
- interest on capital borrowed to finance the manufacturing of the asset to the extent that the interest rate can be attributed to the manufacturing period.
For more detailed information about accounting for your business's intangible assets and how to amortise them, PRV refers to the Swedish Tax Agency.