Resurgent India Knowledge Series- 27th April 2020
Webinar On Valuation of Intangibles
Speaker- Mr. Rammohan Bhave, CA, CMA, CA
Moderated By- Mr. Sudhir Chandi, Director- Resurgent Valuers Private Limited
● Overview of Intangible Assets Valuation
● Purpose & Objective
● Methodologies and Approach
● Intangible assets are long-lived assets used in the production of goods and services. They represent legal rights or competitive advantages developed or acquired by an owner and physical properties are absent. It can be bought, sold, licensed, or rented.
● Aggregators like amazon, Flipkart, Ola, Uber are burning cash to create valuable customer relations, on which people are ready to spend millions.
● This decade belongs to ‘War on Intangible Assets’
● Intangible assets can be categorized into two forms- Natural & Man-made. Natural Intangible assets encompass rights on the activity carried out on or through natural resources i.e. Air, water, land, power, and sky. Examples: Irrigation rights, mining rights, flying rights, landing rights, etc.
● Man-made intangible assets pertain to all those rights to assets that are created by humans. Examples: Software, publications, Film distribution, toll collection, spectrum. The list is far from exhaustive. There are more than 95 types of intangible assets that can be valued.
Aspects to be covered by Valuation Analysts.
● In order to carry out any valuation, it is imperative to know the objective, whether it is for accounting purposes, Tax, M&A.
● Nature of intangible- marketing, technology, etc.
● Gather sufficient financial data related to the intangible asset and analyze market data. The challenge arises in assimilating financial information when the owner is not the client.
● Evaluate the specific economic benefits of the intangible assets i.e. synergies
● Select and apply appropriate valuation methodology based on the nature of the intangibles to be valued. It is a common misconception that the methodology adopted is very limited. There are multiple methods and ways to derive a valuation. So much so that some techniques might even overlap with one another
● Reconcile all the value indications into a final fair value conclusion. Arrive at a range of valuation by analyzing the different approaches used. If the valuations from relevant approaches applied results are different, then make modifications in the inputs to arrive at a correct range Purpose of Valuation
● To understand the nature and classification of intangible assets.
● For transaction pricing and structuring. One has to have knowledge about the price of the transaction-kind or bank & structure of payment i.e. equity shares, etc. There may be intangible assets that may not generate any uses in isolation but are helpful when combined with other intangible assets.
● Financial Accounting and Fair Value Reporting - we might value intangible assets for purchase price allocation, impairment testing.
● Taxation planning, and Compliance- Amortization benefits, transfer pricing (Transfer of intangibles between geographies/companies)
● Other purposes- Licensing of intangibles, collateral for loans, Acquisition of intangibles.
Areas of Valuation for Intangible Assets
● Intangibles that can be valued in different field of work include
● Marketing Related-Trademark, internet dominance, non-competition agreements
● Customer-related- Customer lists, order or production backlog, customer contracts, customer relationships. There are minute differences between these assets that come into play.
● Contract-based- Royalty agreements, lease agreements (dry and wet), operating, and broadcasting rights.
● Technology-based- Patented technology, computer software’s, databases, trade secrets
● The ultimate aim of doing the valuation of intangible assets is to determine the measurable amount of economic benefits it generates. Economic benefits / or revenue enhancement can be in terms of pricing, volume & better delivery. It can also be created with increased cost savings, market share, and visibility.
● For example: how many people associate ‘Biscuit’ with the brand ‘Britannia’
● It also aims at measuring the return on investment. Helps in determining how much of the final revenue is the portion of investment in intangible assets or if it has a multiplier effect?
● Creating a brand requires constantly engaging with the customer base.
There are three types of valuation approaches with multiple methodologies in each approach
● Cost Approach- Under the cost approach, there are two methodologies. The historical cost method uses the details of the past cost of developing to determine the value of the asset. It does not consider future economic benefits. Replacement cost methods involve estimating the cost to recreate an asset with equivalent functionality at the current price. It makes deductions in the value of the assets for physical deterioration, functional/ economic obsolescence wherever applicable.
● Market Approach- Under this approach, comparable transaction analysis can be put forth wherein intangible assets are valued on the basis of other actual valuation transactions. It involves mechanics like calculating price multiples like price to earnings, EV to EBITDA, price to book value, etc. Price multiples are useful in valuation as it can suggest the increase in the P/E multiple, which is due to the intangible asset.
● Income Approach - Relief from Royalty- Under this method, a notional hypothetical picture is created in which a lot of data banks have to be mined. The transaction is created where a brand holding company owns the brand and licenses it to an operating company. The notional price paid by the operating company to the brand company is the royalty rate.
● Excess Earning- It becomes an easier approach. It involves evaluating the Rate of return for tangible assets, the excess can be pinned from intangible. Although, it is highly subjective and easily manipulative because the rate of return can be increased by increasing the projected earnings. One has to be mindful of the bandwidth of the projections. It has to be realistic and also study any additional synergies.
● With- Without method/ incremental cash flows/ premium profits: Valuation is based on the additional profit that the owner will achieve relative to if they did not own the right
● Greenfield method- Greenfield method is most likely used to value spectrums.
● The dominant element in the intangible asset is valued Example- Sachin Tendulkar’s autograph on a bat.
● In today’s economy, the value provided by intangible assets must be captured in enterprise valuation
● Analyst have to expand the range of data sources and techniques they use in valuation and develop methodologies that are relevant to the intangible asset being valued for more reliable results
● Identifying and valuing intangible assets is critical not only in an active management framework but also in investing and quantitative modeling in strategies that rely on financial statements data and that may need adjustments for comparability.
● Youtube Videos by Rustomjee, Partner at Deloitte
● The Coke Story
►Watch the webinar here: https://www.youtube.com/watch?v=JVgfFnj02Hg