How to Value Intangible Assets

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How to Value Intangible Assets

Intangible assets are non-material assets that can be evaluated just as tangible assets, such as real estate leases, securities, and accounts receivable. Among the more common intangible assets are goodwill, trademarks, and customer lists.

Goodwill

Goodwill is an intangible asset that emerges when a buyer purchases an existing business for a price that exceeds the fair market value of the business’s net assets. The financial amount of goodwill is the difference between total assets and total liabilities. It is a measure of a company’s reputation, brand name, and good relationships with clients. Goodwill can be thought of as the value of owning a business that is already established in which case a buyer does not have to look for clients as though he or she were starting a new firm.

Trademarks and Contracts

Trademarks, slogans, and brand names can be very valuable. They can be appraised based on how much more a firm can charge for its merchandise than competitors that are not as well known.

Contracts, including sales, advertising, and employment contracts, are also considered to be intangible assets because they increase the value of a company. For instance, a company can realize tremendous savings by paying below-market rates in accordance with the terms of a long-term lease. Another example is where a business is sold, and the head of the company that is being sold may enter into a contract to continue in that role for a specified period of time. In this way, the company can achieve huge savings in terms of the cost to replace the head of the company with a new leader who would be required to learn the business and become as productive as the former head of the company.

Customer Lists

Customer lists, or proprietary lists, are valuable because they can consist of clients with whom the company has long-term business relationships. They are often considered to be trade secrets. Such lists can be valued based on the replacement cost of the lists, or the repeat sales that are produced.

Other Intangible Assets

Some other intangible assets are intellectual property (IP), which includes patents and copyrights; franchises and other licenses; secret formulas; and tax credits for past losses. Intellectual property rights also apply to the rights that protect trademarks and trade secrets

Seeking Legal Advice

If you have questions or concerns regarding the valuation of intangible assets, you should consult a business attorney, who can advise you as to such matters as corporate intangible asset contributions to charities, intangible asset damages due to breach of contract, and intellectual property license agreements.

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Last Modified: 06-30-2015 11:32 AM PDT

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