Intangible asset valuations
Intangible assets (items such as data, content, software code, company, and product brands, confidential information, inventions, patents, industrial know-how, and design rights today account for more than 87% of all company value today. They are now the primary driver of company profitability and growth.
Unfortunately, intangible assets are essentially ignored by modern accounting standards. They either never make the balance sheet, are lost under the amorphous term “goodwill,” or are listed at cost (and there is essentially no correlation between cost and value with intangible assets).
Why should I value my intangible assets?
Conventional valuation methods tend to significantly under-value intangible assets and intangible asset-rich companies.
For example, a recent report from the UK Treasury highlighted that although the world’s five most valuable companies are together estimated to be worth US$4.6 trillion, their balance sheets report just US$225 billion of tangible assets. The other US$4.3 trillion of value is missing in action.
This is a major problem for shareholders managers and directors because it means that:
Many intangible asset-rich businesses are significantly undervalued relative to their true value.
Many companies own valuable intangible assets are unaware of them and are unable to leverage them because their financial accounts do not refer to them
When should I value my intangible assets?
Understanding the true value of your company and its assets is essential if your organization is:
Selling or listing on a public market
Raising equity or debt capital
Conducting mergers and acquisitions activity (buy or sell-side)
Entering into Joint Venture, Partnership or Alliance arrangements
Entering into license or royalty rate negotiations
Involved in an intangible asset or intellectual property litigation
Paying tax involving intangible assets or intellectual property (especially across multiple jurisdictions)
Conducting research and development
Wanting to manage all assets (both tangible and intangible) effectively
In short, given that intangible assets now account for virtually all company value, it is impossible to understand the true value of a company without a detailed understanding of its intangible assets.
This applies equally to investors or company owners – if you want to maximize your return on investment, an accurate and robust valuation of the company's critical intangible assets is essential.
How does an intangible asset valuation work?
Because intangible assets have been largely ignored by accounting standards, intangible asset valuation is an area that remains poorly understood. Many accountants and valuation providers erroneously claim “you cannot value data/ brands/content/patents etc”. This is incorrect.
While more complex than a conventional valuation, there are methods of valuing intangible assets that are reliable, accurate and robust.
Modern intangible asset valuation methodologies work from the general principle that a strong intangible asset position delivers enhanced competitive advantage which in turn translates into superior market share or margins and ultimately significantly increases the value of the business.
EverEdge BenchMark™ Intangible Asset Valuation
Using a proprietary three-factor model, EverEdge’s BenchMark™ Intangible Asset Valuation methodology utilizes both traditional quantitative methods but importantly also analyzes the Contextual and Qualitative factors. This is critical as these factors are primary drivers of intangible asset value.
This enables both companies and investors to:
Make significantly more informed decisions regarding exits, capital raises, and M&A, JV or license transactions
Better articulate value to potential investors or acquirers to drive increased pre-money or exit values or to potential JV or alliance partners
More robustly defend license or tax transactions or litigation positions
Make better decisions regarding which R&D projects are likely to generate the best “bang for buck"
EverEdge BenchMark™ Intangible Asset Valuations provide companies and investors with robust, defensible valuations that articulate the true value of your company or critical intangible assets.
Why don't traditional valuation methods work for intangible assets?
Conventional accounting standards have evolved to primarly value and manage physical (tangible) assets: things that are easily counted and for which there are liquid markets. They do an excellent job at this.
However, with the rapid shift to a knowledge and digital-based economy accounting standards have not kept up. The result is that traditional valuation methods, such as cost-based analysis or discounted cash flow (DCF), suffer from major issues when applied to intangible assets:
Cost basis valuations are inherently flawed for intangible asset-based business' because there is often no correlation between the cost of an intangible asset and its value. This means that basing a valuation of an intangible asset-rich business on the cost of those assets is likely to dramatically under (or occasionally over) value that business.
DCF valuations, which work well for mature, cashflow positive businesses where the past is a good guide to the future. However, they tend to break down when the company’s future is unlikely to look like its past. Unfortunately, this is frequently the case for intangible asset-rich companies, start-ups and technology companies or businesses exposed to high growth markets or products.
Valuations using these traditional methods are almost entirely based on financial data, which is either absent or highly speculative with these types of companies. They also ignore the critical role and impact of intangible assets, which can have values that are orders of magnitude greater than historical cost, performance or forecast cashflows.
Consequently, traditional methods tend to be vulnerable to error or manipulation, leading management, directors, and investors to make incorrect assessments and decisions about company value.
What results does EverEdge helps its clients achieve?
This is more than theory. EverEdge’s BenchMark™ Valuations have been instrumental in assisting our clients to raise more than a billion dollars in capital.
We have helped to generate the following outcomes for our clients:
Provided the valuation that supported the largest capital raise ever in Asia for a pre-revenue company: $400M raised at a $200M pre-money valuation [Singapore]
Oversaw the sale of a SAAS company at a 67X multiple [Australia]
Oversaw the sale of a financial services company at a 32X multiple [United Kingdom]
Sold the intangible assets of a failed company on behalf of its investors, generating a 45X return [United States]
Valued the intangible assets of a publicly-traded company entering a JV saving them US$22M in cash [New Zealand]
These results mean our Return on Fees tend to be very strong - typically more than 10X - as even a small upward movement in pre-money valuation vastly offsets our fees. For example, consider a small equity raise: if a traditional valuation suggests a pre-money value of $10M and EverEdge’s BenchMark™ valuation supports even a small (20%) value lift, this generates an additional $2M in increased value. Even if we assume valuation fees of $100K this is a 20 to 1 return on fees. Many valuations will cost considerably less than this.
How will EverEdge help me justify my valuation?
A broad range of factors are typically reviewed in an intangible asset valuation, which means the resulting report tends to be more expansive, with a greater emphasis on prose, explanation, and evidence than endless (easily manipulated) spreadsheets.
An EverEdge BenchMark™ Intangible Asset Valuation will read as a robust, defensible, business-focused report that articulates and contextualizes the value of the most valuable and important assets the company owns today - your intangible assets.
The valuation will be built on a solid interlocking framework of multiple, well-researched factors that together support a value that can be relied on. This enables companies to seek – and secure – better outcomes during transactions and to better understand day-to-day how their intangible assets can be managed to drive additional growth and profitability.
EverEdge staff are also available to meet with investors, counter-parties to M&A or JVs, regulators or tax authorities or appear as expert witnesses to defend their valuations.