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Important Things You Should Know
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YOUR BUSINESS NEEDS TO STAY DYNAMIC IN A COMPLEX ECOSYSTEM
Company Intangible Valuation
Related like Trademarks, Trade Name, Brand, Goodwill, customer networks, users, etc.
Intangibles Valuation technology, patents, platforms, business solutions, etc.
Intangibles Valuation like non-compete, franchise, licensing, marketing rights, service contracts, etc.
Intangibles Valuation Approaches
The approaches used in valuing Intangibles can be either the standard financial approaches or research-based approaches. However, the methods depend on the nature of Intangibles, but some ways are cost, income, and market approaches.
The cost-based approaches describe the value of Intangibles as the total of all historic costs incurred or replacement costs needed in developing the Intangibles to its present condition, which is the aggregate of the development costs, marketing costs, advertising, and other communication costs. Thus, the cost-based Intangibles valuation can be accomplished through:
The historical cost of creation method uses the historical cost of taking the Intangibles Valuation to their present value.
The replacement cost method accomplishes Intangibles valuation by considering the expenses and investments needed to replace Intangibles with a new one that has a similar advantage for your company.
The cost to recreate method uses the current outlays to determine the cost of recreating Intangibles currently.
The residual value method affirms that the Intangibles value is the residual value achieved by finding the difference between cumulative revenues attributable to the Intangibles and cumulative Intangibles costs.
The cost-based approach is usually unsuccessful because of no straightforward association between the financial investments taken up and the value addition of the brand.
The income approach is the most popular approach employed for valuing an intangible. It centers on the current value of the economic advantages that the Intangibles will produce in the future. The approach analyses the profits earned in the future by essentially using the Intangibles name. However, the approach is surrounded by the vagueness of future predictions. Some of the methodologies of this approach are:
The relief from royalty method is an ‘economic usage’ valuation method that ascertains the value of Intangibles concerning the royalty owed for using it when owned by a third party.
Multi-Period Excess Earnings Method — is a method of estimating the excess revenues that accrue to the intangibles assets due to its uniqueness. In this model, revenues and cash flows derived from the intangible asset are calculated, and then the cash is attributed to supporting assets and adjusted to find the value of intangibles. This is further adjusted with various factors like complexity, life, risk, marketability, protection factors to arrive at the correct value.
The incremental cash flow method recognizes all cash flows produced by the Intangibles in a business by comparing with similar companies with no such intangibles. As a result, both elevated revenues and decreased costs increase cash flows.
The market approach investigates the value based on the transaction value of assets. The valuation in this approach is assessed as per the transactions among third parties. Therefore, the method is typified by great objectivity. However, in particular, for intellectual property rights, identical transactions with comparable recognition, intensity, or economic and legal scenarios usually do not occur, and the implementation of this approach is quite hard.
Moreover, all the above standard financial approaches cannot determine the Intangibles value because, during Intangibles valuation, qualitative elements also should be measured based on studies on consumer behavior. Hence, in the Intangibles valuation process, it is imperative to undertake both the financial approaches of valuation and research-based approaches.
Sometimes the intangible asset may not sound appropriate for the current time, but it may be beneficial in the future. Therefore, such intangible assets are optional to avail by the company because they may or may not value in the present time but maybe in the end, as this can be a valuable asset. Some of the valuations approaches.
Binomial Option Pricing Model (BOPM): We use the BOPM approach to estimate the appropriate current price on a given day for an anticipated future payoff. The BOPM model is extensively employed because of its ability to deal with several conditions.
The binomial model is one of the preferred models, but this is more complex than Black Scholes for valuation. Under this approach, we calculate the option pricing using various probabilities and data like using exercise price, volatility, the life of assets, success factors, etc. The binomial method is quite complicated and can allow for more variables and events during the vesting period.
Monte Carlo Simulation: Under the Monte Carlo model, many random variables are simulated to estimate the fair value of intangibles of the company. This is one of the most flexible models used to calculate the risk and valuation and easy to explain the model’s outcomes. However, this model requires complex calculations and may need multiple simulations to calculate the right value. This model can manage the complex situations of intangibles valuation, but the model is difficult to explain and understand.
Black-Scholes-Merton (BSM) Model : We use the BSM model in valuing the intangibles. It is handy to determine fair prices of intangibles based on variables, including volatility, type, actual stock price, strike price, time, and the risk-free rate.
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HOW DOES VALUATION HELP YOUR INTANGIBLES?
Benefits of valuing a Intangibles
Intangibles valuation can help you to buy or sell or license an intangible with ease, discuss better terms with the buyers or sellers of the intangibles and choose the right time for selling or purchasing a intangibles.
Periodic valuation is a good practice because it helps you evaluate and appraise your intangibles functioning; uncover business areas that need improvement and quickly raise capital for your intangibles.
- Most of the research-based approaches that value Intangibles use consumer behavior and mindsets that influence the economic functioning of Intangibles. Though the complexity and intricacy of such prototypes differ, they all attempt to describe, elucidate, and compute consumer viewpoints that affect their buying actions. The approaches encompass several measurement tools, such as stages of familiarity, understanding, recognition, significance, particular impression, buying thoughtfulness, inclination, contentment, and endorsement.
- All these features are allocated diverse Intangibles equity scores, and the sum of all the scores assigned to various features gives the complete Intangibles score. An alteration in one or a grouping of indicators is anticipated to affect consumers’ buying actions, influencing the financial value of the Intangibles being evaluated. However, these approaches do not distinguish between the outcomes of other prominent aspects, such as R&D, design, and the brand. Hence, these approaches do not define identifiable marketing indicators and financial functioning.
What Are The Purposes Of Intangible Asset Valuation?
What Are The Different Steps Undertaken During The Appraisal Of Intangible Assets?
- Recognition of the intangible asset;
- Data collection and analysis;
- Examination of the remaining helpful life and implementation of the three valuation methodologies; and
- Deduction of value.
What Is The Significance Of Intangible Assets In Business And Legal Transactions?
What Are Some Of The Key Documents Essential For Carrying Out Intangible Asset Valuation?
- Copies of present patents and patent applications;
- Comprehensive list of all technical illustrations, specifications, and blueprints of the product;
- Complete list of all customers on the present customer list;
- Copies of all active contracts with clients;
- Overview of all present customer proposals and unsettled quotations;
- List of all software purchased from outside and programmed in-house.
What Factors Are Responsible For An Improvement Or Degradation In The Value Of Intangibles Assets?
- physical factors such as an accident or catastrophe;
- functional factors, such as inadequacy and technological evolution;
- operational factors, such as management and accounting methods;
- economic conditions, such as less demand, rate of interest, and inflation.
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