- For the production of goods and services, intangible assets are used. Intangible assets are long-lived assets. It is identified as a non-monetary asset without physical properties unlike a tangible asset such as a factory or a machine that would be in property, plant, and equipment. Both intangible and tangible assets have a significant role in business operations. Therefore, the valuation of both assets is important.
- The International Glossary of Business Valuation Terms (IGBVT) has defined Intangible assets as “non-physical assets such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts (as distinguished from physical assets) that grant rights and privileges, and have value for the owner.” (IGBVT is a glossary of business valuation terms).
- A business valuation provides a universal aspect of business management with various facts and figures to the value or actual worth of the Company in terms of asset values, income values and market competition.
- Valuation is considered an integral component of business entities and it has gained a lot of attention after the surge in business activities. Valuations are pervasive, whether be it in a start-up company or a big corporation.
Business Valuation of Intangible Assets
Intangible assets cannot be overlooked as valuation includes analysis of a Company. Numerous intangible assets are important as they assist immeasurably in enhancing the sale of the business, some of the intangible assets are; certification marks, designs, trademark, tradename, advertising agreement, licence etc. To the owner of intangible assets, some measurable amount of economic benefit should be generated to have value, cost savings, earnings, increased market share, incremental turnover or visibility. The exploitation of intangible assets is done by the owners through direct use (they use it in their own business) or indirect use (through a licence fee or royalty).
The Benefits of business valuation of intangible assets are;
- Assistance and guidance during Merger & Acquisitions
- Better knowledge of Company Resale value and Company Assets
- Business Image can be created
- Differentiate product from similar products
- Access to more investors increases
- A true Company Value can be obtained
- Intangible assets can be classified as indefinite or definite.
- The brand name of a Company is an indefinite asset as it stays with the Company for as long as the Company is operating but if a Company licence another Company’s patent with no intention of extending the agreement then the agreement has a limited life and it would be classified as a definite intangible asset.
- Intangible assets are the non-physical substance of a business such as goodwill of a business, its reputation among the customers, the morale of the employees or a trademark; they are valuable as they have the competence to generate revenue.
- Valuing equity and valuing fixed assets such as cars, property and machinery are usually straightforward. But the intangible assets are the strength of a business; the brand name, customer relationships, goodwill, networks and patents.
- There are a variety of methods to value intangible assets such as multi-period excess earnings, replacement cost or a royalty relief
Marketing of Intangible Assets
- One of the essential intangible assets is a trademark; A trademark is a recognizable expression, design or sign which identifies goods or services and the trademark which is used to identify services is known as service marks.
- In order to designate the goods or the services of the owner, a trademark is in the form of a figure, letter, mark, name, symbol or word; these are required to distinguish goods or services from those manufactured and provided by others.
- Mc Donald’s is the perfect name for a trademark. It is a recognizable insignia and a symbol that denotes the specific good or service and it legally distinguishes it from all the other goods.
- To protect brand name a trademark is used, it can also be associated with the trade name.
- Logos, slogans and symbols are protected by trademark.
- One of the valuable business assets is the name and it is worth protecting.
- A Company’s reputation is indicated by goodwill.
- A Company’s future earnings and capacity is reflected by it.
- The goodwill can be estimated or purchased.
- However, estimated goodwill is based on capitalizing capacity and profit earning
- When a Company acquires another Company, at that time the purchased goodwill, will arise.
- When an exclusive right is granted to the inventor or the manufacturer of goods or services, then it is known as a patent.
- When there is an active and successful operation of the patent office, then one can observe high-quality service and an increase in public awareness of the protection of new inventions through patent rights.
A functional system for effective protection of Intellectual Property Rights is required, it is very efficient and it depends upon different organizations and the relationship they share by cooperating and uniting, for progress in the field of innovation and creativity.
- Every element of valuation has practical relevance, the theoretical knowledge on valuation will never serve the purpose.
- A professional is always required to be acquainted with the elements of valuation to have a holistic approach to valuation and to overcome valuation-related issues or it will be very difficult to discharge the professional obligations.
- Different valuation approaches are embraced with time, it depends on the magnitude, nature and scale of the business organization.
- Intangible assets do not have physical value when compared to equipment or a factory. They can be proved valuable for a business and can be critical for the Company’s long-term success or failure.