Intangible Asset Valuation
There are two primary components of any business enterprise that make up value: tangible assets and intangible assets. Tangible assets are physical assets. These are the “hard assets” of the business and are usually easily identified and accounted for. The determination of their value is relatively straightforward.
Intangible assets are defined as identifiable non-monetary assets that cannot readily be measured which are created through time and/or efforts and are classified as a separate asset class considered material to producing revenue. Examples include:
- Customer Lists
- Distribution Rights
- A Superior Management Team
- Non-compete Agreements
- Physical Location
- Special Processes
- Name Recognition
Quite often, the value of a company's intangible assets is much greater than its tangible assets. Valuing intangibles, however, is where one needs the services of a qualified business valuation professional: it requires a careful analysis of many aspects of a business enterprise and requires skills acquired through specialized training and experience.
The valuation of intangible assets is more art than a science. The valuation analyst must understand the business’s strengths and areas of vulnerability, the competitive landscape, marketplace expectations, and industry and economic prospects along with other factors having a material impact on future earnings potential. All of these elements affect the risk of ownership interest, which in turn affects value.