Intangible Asset Valuation
Half a century ago, intangible assets made up just 17% of the S&P 500’s total assets. By 2020, that figure had hit a staggering 90%, according to an Ocean Tomo Intangible Asset Market Value study.
The growth of companies such as Google, Meta, and Uber has led to a disproportionate level of intangible assets being the major constituent of major indices around the world.
Instead of the more traditional tangible asset classes such as buildings and equipment, land, cash and bonds, and inventory, intangible assets have no physical substance.
“Like tangible assets, they are expected to bring in future economic benefits to their owners. Common examples of intangible assets include patents, brand value, customer data, software, fishing and mining licenses, and marketing rights”, William explained.
Much like other assets such as working capital and fixed assets, intangible assets are indispensable to the day-to-day operations of the business. Often, they may be the most valuable assets of a company but can easily be overlooked because of their lack of physical substance. What is important is what are the key profit drivers of the business.
When it comes around to valuing intangible assets, it is difficult to account for the uniqueness of each asset, although the market transaction of “similar” assets is one avenue that can be explored.
“As such, many intangible assets are mostly valued by the income approach, embodied by the discounted cash flow method. Essentially this method values the intangible asset as the sum of all the future economic benefits the asset is expected to bring in at the current value”, according to William.
The understanding of the valuation of these assets is an invaluable tool to assess the price at which they can be traded, especially through the due diligence process, for example, as it is important for a company to know what the intangibles asset value is.
Companies need to consider the future cash flows that each intangible asset is expected to generate in the short, mid, and long-term.
The valuation process gives senior management insight into how the value of such assets could be optimized in the future, which in turn can assist in strategic planning for the future and build value for the company.