Putting a value on intangible assets is a key component of business valuation. However, valuing intangible assets is challenging because their value is subjective. In some cases, business owners tend to overestimate the value of intangible assets. But when it comes to selling your business, it is essential to get the best price for it. This requires using proven business valuation methods to get a fair market value on intangible assets.
What are Intangible Assets?
Intangible assets are nonphysical assets that the business owner puts value on. According to the International Glossary of Business Valuation Terms, these can include intellectual property (IP) like “trademarks, patents, copyrights, goodwill, equities, mineral rights, securities, and contracts.” These add value to a business because the owner can sell them or earn royalties.
The biggest issue with the valuation of intangible assets: No market comparables
For example, a product may sell well because it’s associated with a particular brand. Or a business may own a patent, and there are still many years until its expiration. In other cases, a customer list or customer goodwill represents a valuable intangible asset to a company that can increase the company’s value.
Do you want to know how much your business is worth based on its assets? We have a team of valuation experts who can help determine the value of your business. Here you will find five reliable valuation methods to put an accurate price tag on your company’s intangible assets.
Intangible Assets — 5 Business Valuation Methods
Putting the right price on intangible assets requires using a suitable method for valuation. Here are five business valuation methods based on income, cost, and market health.
1. Relief from Royalty Method (RRM)
The Relief from Royalty Method calculates the value of future payments based on earnings estimates for the asset’s owner. This approach is typically used for intangibles such as patents, copyrights, trademarks, franchises, and domain name valuation. The business valuation is based on the market and income.
2. Multi Period Excess Earnings Method (MEEM)
The multi-period excess earnings method determines value based on the income the asset is likely to generate. The cash flow is then discounted to its present value. This is a relatively complex method. However, it’s helpful in valuing startups, technology firms, and customer relationships.
3. With and Without Method (WWM)
The With and Without Method is based on a discounted cash-flow model. It estimates the value of an intangible asset to a business. The business valuation compares the asset’s value to the company when it’s in place and when it’s not. This valuation method is helpful in non-compete agreements.
4. Real Option Pricing
The Real Option Pricing method calculates the value of assets that have the potential to generate cash flows in the future. The option pricing model is useful when the business owns types of assets like undeveloped natural resources or undeveloped patents.
5. Replacement Cost Method Less Obsolescence
This business valuation method calculates the cost to create the intangible asset from new. Then, the asset’s value is adjusted for obsolescence, similar to how depreciation is applied.
Valuation of intangible assets: Key takeaways
Our team of business valuation professionals at Cunningham & Associates has years of experience in providing defensible valuations for businesses. We work with you, using the most suitable business valuation methods to value tangible and intangible assets.
Contact us today to find out how much your business is worth.