Valuation Approach & Methods for Intangible Asset

1. AppliedValuation Approach
For Intangible Assets
By Chua Park Chin
KPH Property Consultants Sdn Bhd (Malaysia)
pcchua@gmail.com
Mobile +60 12 2134978
16 September 2019 (version 1.0)

2. Table of Contents
 Defining Intangible Asset
 Valuation purposes
 Determining the identifiable
 Qualifying the unidentifiable
 Economic life
 Classification of identifiable intangible asset
 Market Approach
 Income Approach
 Royalty Exemption Method 1 & 2
 Incremental Profit Method
 Excess Earning Method
 Cost Approach
 Alert & Guidelines

3. Defining Intangible Asset
 Intangible Asset is a non-monetary & non-
current asset that can reveal value via its
proprietary economic properties by types,
ownership & legal right or vested interest.
 Proprietor or owner of asset can receive
economic benefits in monetary or non-
monetary terms from owning, using or sharing
the rights granted & interest vested over a
defined period.

4. Valuation Purposes
 Merger & acquisition
 Sales & purchase of business & intangible asset
 Legal cases & litigations regarding insolvency,
infringement, damages & liabilities
 Royalty, licensing, copyright
 Replacement, substitution, modification, subdivision
& exchange of asset & vested interest
 Insurance premium
 Financing – debt or equity
 Financial reporting & internal management
 Taxation & exemption

5. Determining the identifiable
 Asset that can be individually separated or
divided from the principal entity for sale,
transfer, rental or lease with agreement,
regardless the intention of the principal entity
to do so.
 Asset that can be derived from the contractual
or the legal rights, regardless the feasibility of
transfer or isolation from the principal entity or
possibility of forming other rights, obligations &
commitments.

6. Qualifying the unidentifiable
 Unidentifiable intangible asset linked to a
business or a groups of inseparable asset can be
qualified as Goodwill.
 Goodwill can deliver future economic benefits
from a business, interest or application of a
group of inseparable assets.
 Example: Valuation of goodwill for acquisition of
a 30-year old AAA grade franchise of spray-paint
workshop & spared parts supplier within a
commercial neighborhood of car dealers.

7. Economic Life
 Intangible asset & goodwill have a finite period
of economic life restricted by the limit in
◦ legal framework & status
◦ technological advancement
◦ physical endurance
◦ functional & economical obsolescence
 Pattern of application, uses & replacement costs
& alternatives can affect the estimate &
adjustment of economic life of intangible assets.

8. Classification of Identifiable
Intangible Asset
 Identifiable Intangible Asset can be generally
classified in types by:
1. Marketing
2. Supply & Demand
3. Technology
4. Artistic & Abstract
5. Legal & Contractual

9. Class: Marketing
 Marketing & promotion of products & services
 Trademark, trade name, domain name, logo,
geometrical specifications
 Special designs & offer of trade
 Non-disclosure & trade secret
 Exclusivity & non-competition agreement
 Limited access by validity period, geographical
area, marketing channels, distribution network,
occupations, applications & purposes

10. Class: Supply & Demand
 Related to knowledge & relationship with the
customers & suppliers
 Agreements in service level & terms &
conditions of supply
 Employment & special engagement
 Strategic alliance with clients, producers &
supplier that can form monopoly or oligopoly
 Royalty, licensing & copyright

11. Class:Technology
 Contractual or non-contractual rights to use
patented technology
 Database, software, network
 Processes & methods
 Recipes & formula
 Design & patents

12. Class:Artistic & Abstract
 Royalty from artistic work – film, music, books,
scripts, graphic design, photography, play &
performance
 Contents – digital or manual
 Design – architectural, interior, fashion
 Research & development
 Non-contractual copyright protection
 Sensual – visual, acoustic, smell, touch, taste

13. Class: Legal & Contractual
 Contractual commitments & obligations
 Agreements of service & supply
 Licensing, royalty & copyright
 Permit of publishing & broadcasting
 Right of extraction, derivation, modification &
duplicate
 Fulfillment costs of obligations, compensation,
penalty, damage remedy & clean-up (exit or
terminal cost)

14. HandlingValuation
 Market Approach
 Income Approach
◦ Royalty Exemption Method
◦ Incremental Profit Method
◦ Excess Earning Method
 Cost Approach

15. Market Approach
 Determine value by market activities like bids, offer,
or transactions related to similar assets.
 Compromise for comparison with similar assets,
because of rare market evidence of identical assets.
 Conclude multiplier of valuation from sale
transactions of similar assets with consideration of
◦ Price Earning Ratio (PE)
◦ Rate of return
 Adjust to reflect differentiating characteristics via
qualitative factors, if lack of quantitative evidence.

16. Income Approach
 Conduct present value of income, cost saving,
profit or cash flow resulted by the application of
intangible asset within defined period.
 Being generally used when lack of market
evidence of transactions.
 Possible alternative approach used when
present value of income stream of this asset is
significantly higher (exceed 10% difference) than
the available market evidence of similar
transactions due to rare situation of comparing
identical assets.

17. Royalty Exemption Method
 Step 1: Compare with the licensing of the
intangible asset from 3rd party to determine the
value of the imaginary or hypothetical single or
series of payments of royalty or copyright.
 Step 2: Find present value by discounting series
of payment after deducting for tax at the
valuation date.
 Royalty payment is applicable by
◦ one lump sum upfront
◦ initial amount followed by series of payment

18. Royalty Exemption Method
 Royalty payment can be a percentage of revenue
or profit share or other financial requirements.
 The business interest of a specific intangible
asset is possibly to be exchanged or substituted
with another intangible asset with mutually
agreed adjustments by willing licensee &
licensor.
 Used in valuation of commercialization of
artistic & abstract, technology advancement &
productivity improvement via process & system.

19. Royalty Exemption Method 1
 Step 1: Derive hypothetical royalty rate or
payment by comparing market royalty rate with
comparable asset or similar transactions.
 Step 2: Validate whether such evidence exists
that the assets are licensing at the arm’s length
transaction at a regular basis in an active
market.

20. Royalty Exemption Method 2
 Step 1: Derive hypothetical royalty payment via
share / split of either revenue or profit.
 Step 2: Such arrangement must be paid in the
arm’s length transaction by a willing licensee to
a willing licensor for using the right of the
intangible asset.
 Step 3:Analyze the operating margin from
income generated from the application of asset
by of a typical operator.

21. Incremental Profit Method
 Step 1: Compare forecasted profit or cash flow
between a business / company using intangible
asset with that of from another similar business
/ company that does not use.
 Step 2a: Discount the forecasted difference or
increment profit or cash flow generated to a
present value at the valuation date.
 Step 2b:Alternatively, capitalize the forecasted
difference or incremental profit or cash flow
with, a reasonable if not market-derived,
multiplier or rate of capitalization.

22. Excess Earning Method
 Step 1: Determine the earning or cash flow
attributable to the subject intangible asset.
 Step 2: Find the portion of earning or cash flows
or determine an appropriate economic rent that
are attributable to the contributing tangible,
intangible & financial assets.
 Step 3: Find additional value attributable to the
fact that all assets are applied together as a
going concern. Eg.Account for cash flow &
benefit attributable to the asset of an assembled
workforce that would not be available to the
buyer of an isolated asset.

23. Excess Earning Method
 Step 4: Determine the present value of (result
of Step 1 deducts results of Step 2 & Step 3).
 Used in valuation of customer contracts &
relationship, work-in-progress R&D projects.

24. Cost Approach
 Mainly applicable for determining the value of
the internally / self generated intangible assets
that have no immediately identifiable income
stream.
 Step 1: Identify similar asset that can
contribute similar economic value & utility or
service potential.
 Step 2: Estimate the replacement cost of asset
in Step 1.
 Used in valuation of in-house developed
software & IT resources, assembled
workforce.

25. Alert & Guidelines
 Use prudent & well-informed judgment with
professional knowledge & experience to reach a
logical conclusion in value.
 Apply reasonable basis & appropriate evidence.
 Conclude value at specific & definite valuation date.
 Should never use average & weighted techniques to
determine the final value of asset.
 Always be alert to identify the direct & indirect
impact of intangible asset in valuation of specific
business, real property or plant & machinery.
 Always verify updated records on geographical
coverage of legal status & proof of ownership of
intangible asset, especially Intellectual Property (IP).