What are Intangible Assets and How to Appraise Them

 

When performing asset appraisal for your business, consider intangible assets. Intangible assets include copyrights, equities, securities, contracts, goodwill, franchises, and trademarks. They are different from the physical assets such as land, which provide value, privileges and rights to the proprietor. Intangible assets lack intrinsic value and physical existence. More often, intangible assets provide long-term growth to your business. If you want to start asset appraisal for your intangible assets, consider limited life and indefinite useful life assets.

Indefinite intangible assets provide long-time benefits to your business despite any catastrophe. They generate income at all times. These assets include brand recognition, goodwill, and business trademarks. On the other hand, limited-life intangible assets provide cash flow for a small period. A common example of a limited intangible asset is a patent. Patents have a specified agreeable time.

Types of Intangible Assets

Customer Relationships

Customer relationships are an example of an intangible asset. The relationship provides an intangible link between your business and the customer.

Domain Names

Every business is registered online under a specific domain name which is not assigned a specific book value. However, domain names provide a gateway to your business and the right domain name can make a big difference.

Legal Rights

One method of asset appraisal of intangible assets is looking at legal rights. These rights include permits and licenses. For instance, your business might have legal rights to manufacture certain products such as chemicals. Production of these materials form part of the intangible assets of the business.

Trade Secrets

Trade secrets are, for the most part, hard to value. They are ethereal. However, trade secrets add a lot of value to your business. If you have certain trade secrets, you will have more sales in your business.

Computer Software

Some businesses require that you have computer software to run. You will add intangible assets to your business if you purchase and possess this software.

Copyrights and Patents

All intellectual properties of your business form part of the intangible assets. If you consider calculating asset appraisal for your business, consider trademarks, trade names, patents and copyrights. For instance, a trademark helps earn more revenue for your business. Copyrights and trademarks help your business grow through brand recognition.

Licensing Agreements

Agreements between your business and third-party companies add assets to your business. Although they may not have a quantified value, these agreements form part of the intangible assets.

Brand Recognition

One of the factors that help your business grow and succeed is brand recognition. If your business has a good brand name, it will have more sales than a business with less recognition.

Appraisal of Intangible Assets

These are the concepts involved in the intangible asset appraisal:

Purpose of Appraisal

You can appraise your intangible assets for the following reasons:

• Transactional purposes include securitization, transformation, disposal, contribution, merger, demerger, and acquisition.
• Litigation purposes. If there is an infringement lawsuit, an appraisal is performed to ascertain the level of damage.
• Similarly, appraisal of intangible assets can be done for arbitration purposes.
• When your business is bankrupt, or if you want to close your business, a court may require you to pay your creditors and dispose of your assets.
• When you want to change your business equity, such as; warrants, shares, and bonds.
• For financial reporting purposes and other internal business issues.

Intangible Asset Appraisal Concepts

There are four concepts of intangible asset appraisal. These are:

• Owner Value: Refers to the view of a business owner on the value of intangible business assets.
• Market Value: It compares a certain business with a similar business in the same industry and market.
• Tax Value: Includes growing concern, liquidation, and investment value.
• Fair Value: A legally binding value between a purchaser and a vendor in an open market.

Methods of Intangible Asset Appraisal

Unlike tangible assets, valued through costs and depreciation, intangible assets are complex to value. However, there are methods to value these intangible assets. The following the methods of intangible asset appraisal:

Income Approach

The income approach is the best method when dealing with an intangible asset associated with business revenue. For instance, when appraising the worth of a certain patent, the income approach is favorable. In this case, you will calculate the benefits of the said patent to your business. You can review the amount of income generated since the inception of the patent.

Market Value

When estimating the value of an intangible asset, the market value is a solid method. If you want to estimate the value of your intangible assets, assess their benefits to your competitors. For instance, you may assess the value of certain trade agreements between a business and a retailer. You can use the same data to determine the value of similar license agreements.

Cost Method

The cost method is a common way to value tangible assets. However, it is a useful way to value intangible assets. Some intangible assets that can be valued using this method include business software. The cost of purchasing or replacing such software is the appraisal value.

Estimates of Past or Future Economic Values

These appraisal methods can be evaluated in the following ways:

Relief from Royalty

In the case of a license, the method compares the amount a purchaser is willing and able to buy the commodity. The risks and the returns are then calculated to determine the viability of such assets.

Excess Profits

The excess profits method uses tangible assets. The excess profits from the current tangible assets provide the value of intangible assets.

Gross Profit Differential

It is the best method when valuing a brand or business trademark. The difference between unbranded and branded products provides the value of the intangible asset.

Capitalization of Historic Profits

The method factors an intangible asset’s profitability, protection, advertising, market share, and stability. However, this method does not account for future asset appraisal.

Conclusion

Valuing intangible assets is an important aspect of your business. Intangible assets contribute immensely to the growth of your business. However, they are complex to appraise since the asset is not concrete. If you want to capture an accurate asset appraisal of your intangible asset, contact Wiley Financial. We are certified financial analysts and are here to help!

Original Source: https://wileyfinancialinc.com/what-are-intangible-assets-and-how-to-appraise-them/