Purposes for Intangible Asset and IP Valuations
Intangible assets are assets, other than financial assets, that lack physical substance. Over the past 25 years, intangible assets have become critical assets for most operating companies. Studies indicate that global intangible asset value exceeds $50 trillion and almost all agree that, for most business enterprises, the majority of value is comprised of intangible assets.
Aside from the enormous value of intangible assets, in today’s business world intangible asset transactions occur frequently and certain tax strategies depend importantly on the value of same. Understanding the value of intangible assets can be challenging for many but the process begins with asset identification. To this end, it is often overlooked that there are only four kinds of intellectual property (IP) rights that the laws of the U.S. and most industrialized nations recognize: patents, copyrights, trademarks, and trade secrets. However, despite limited legal protection, the value of intangible assets and goodwill often goes well beyond IP-based legal rights. In fact, there are dozens of identifiable intangible assets and therefore it is critical to hire a seasoned valuation expert. A list of intangible assets that MPI has experience valuing includes:
- Assembled workforce
- Brand names
- Corporate goodwill
- Customer contracts
- Customer lists
- Customer relationships – non-contractual
- Distributor relationships
- Favorable/unfavorable contracts
- Franchise agreements
- In-process research & development
- Leasehold interests
- License agreements
- Development stage consumer products
- Literary works
- Lyrics/song rights
- Musical compositions
- Non-compete agreements
- Order backlog
- Other works of authorship
- Personal goodwill
- Technical know-how
- Trade dress/logos
- Trade secrets
- Trade names
- Unpatented developed technology
MPI has conducted hundreds of intangible asset valuations for clients at various stages of their life cycle. We have assisted on the following types of assignments:
- Corporate restructuring transactions involving a transfer of IP
- Impairment testing purposes under ASC Topic 350/360
- Purchase price allocations of goodwill and intangibles under ASC Topic 805
- Transfer pricing for internal and external IP transactions
- Valuations for estate planning or estate tax administration purposes
- Ad Valorem Taxes: Some of the techniques used by property taxing authorities include value that is intangible in nature. Therefore, in certain cases, in order to determine the correct property tax base, these intangibles must be valued and removed from the business enterprise value.
- Bankruptcy and Reorganization: Value opinions may be necessary for reorganization situations to define the intellectual property assets, their values, amounts, and allocations available to debtors, and the impact of proposed restructuring plans.
- Collateral-based Financing: Companies that have intellectual property or intangible assets as their main asset may be required to determine the fair market value of those assets in order to obtain a loan or comport with loan requirements.
- Corporate Planning Purposes: Values of intellectual property provide management teams with important information that may be used to analyze and optimize capital budgeting and other strategic decisions. For example, the value of the existing intellectual property may be used to set R&D budgets or to identify commercialization opportunities, licensing opportunities, or a potential asset sale, among other types of transactions.
- Corporate Restructuring: In a restructuring initiative, a valuation of intellectual property may be necessary for general planning, tax planning, or compliance.
- Financial Reporting Compliance: In accordance with ASC Topic 805, the fair value of identified intangible assets is regularly determined in connection with purchase price allocations and, in certain instances, for other financial reporting purposes.
- Intercompany Transactions: Intellectual property is sometimes transferred between related parties, both domestically and internationally. In such cases, a valuation is necessary to support the transaction.
- Licensing: In licensing situations, an independent royalty rate to be charged for use of the intellectual property is determined by a third-party appraiser.
- Litigation: Determining the damage done to a patent or trademark holder by an infringer requires that a value is placed on the patent or trademark. Valuations of intellectual property may be required as support in other commercial damages cases, as well. Further, in marital dissolution, values of intellectual property or intangibles must be determined as part of the marital assets.
- Personal Goodwill: A portion of the goodwill of a business enterprise can sometimes be attributed to individual company owners or key employees. Recognition of this fact may have important tax implications, most notably in sale transactions and matrimonial distribution situations.
- Personal Tax Planning and Compliance: More and more frequently, we are seeing transfers of intellectual property for estate planning purposes. In certain cases, intellectual property must be valued in order to file a gift or estate tax return. Separately, the charitable contributions of intellectual property must be substantiated with a valuation.
- Strategic Alliances: As companies join together to create a greater economic benefit, it is often important to value the independent contributions, including intangible assets, each brings to the alliance in order to determine comparative ownership.
Determining a credible value for intangible assets and goodwill can be challenging as such assets are hard to price. Oftentimes, intangible assets do not generate any income, or if income is generated it cannot be generated in isolation but rather requires contributions from other corporate assets. Further complicating matters is that due to their very nature, intangible assets are constantly changing and therefore the value of intangible assets changes over time as well.
The diligence, procedures, and considerations, among other factors, required to value intangible assets make it critical that you hire a seasoned valuation Practitioner. MPI has the experience and expertise to provide reliable intangible asset valuations. Please contact us if we may be of assistance.