Those in the market for a business valuation may be asking themselves “what exactly is an intangible asset?” Webster defines it as “something that represents value but has either intrinsic value or no material being.” Such assets, while difficult to identify and determine the value of, often play an important role when a certified appraiser is determining a company’s value. So how do you determine the value of intangible assets in a business appraisal? Let’s put on our valuation analyst hats and consider some of the issues. Some of the more common intangible assets found in the business world include:
Proprietary lists. These can include customer or client lists, patient lists, and mailing lists made up of customers or prospects. Such lists hold value to a business, particularly if those relationships are ongoing. For example, a magazine may get 75 percent of its advertising revenue from the companies on its client list; making it critical to the magazine’s future profitability.
Beneficial contracts. Long-term contracts can add value to a company; particularly ones that allow it to sell its products or services for a higher than normal mark-up or lease items below market value.
Patents and Copyrights. Simply put, a patents’ worth is dependent on the strength of the patent claim as well as its economic and legal life. Copyrights, while they may enjoy a long legal life, often may maintain practical value for a shorter time period. An example would be a technical work that quickly becomes outdated.
Trademarks and Brand Names. Both have value if as a result a company can sell its product in higher quantities or for higher prices.
Subscription and service contracts. Many media outlets (magazines, newspapers, cable companies, etc.) derive the majority of their revenue from these sources.
Franchise agreements. Franchises with an established track record of success and high visibility, name franchises if you will, are infinitely more valuable than a new franchise that is still working to establish its name.
Software. Many companies develop proprietary software specific to their businesses. If this software provides efficiencies and benefits that the business would not otherwise enjoy without it, this may be an additional value driver.
Because each business is unique no list of intangible assets could ever be complete. Even so, the above list provides a look at the type of intangible assets that can add value to a business. Call American Business Appraisers today at 623-935-2112 to talk with one of our appraisers about your business valuation needs.