In today’s marketplace, patents, copyrights, brands, customer lists and other intangible assets add significant value to many companies. However, because intangibles are often developed internally, they’re rarely included on a company’s balance sheet. The unique nature of these assets also makes them harder to value than hard assets, such as receivables or equipment. Here are some common reasons for businesses to identify and assign value to intangible assets.
Company Decision Making
Intangible asset values are important to know when managing a company’s day-to-day operations. For example, businesses need to know how much intangibles are worth when they:
- Purchase general liability and business interruption insurance;
- Pledge intangible assets as collateral for financing;
- Enter into a joint venture with an individual or company to develop new products;
- License intangible assets to (or from) another entity; or
- Sell intangible assets to a third party.
Likewise, when companies buy or sell a business, the value of intangibles takes center stage. Sellers need to understand the types of unrecorded intangible assets they’ve accumulated over the years to set a realistic asking price. And buyers need to perform sufficient due diligence on the value of intangibles to make a reasonable purchase offer — and to avoid overpaying.
When one company acquires another, U.S. Generally Accepted Accounting Principles (GAAP) requires the purchase price to be allocated among the acquired tangible and intangible assets. These accounting rules now give private companies the option of electing to amortize goodwill over a period of ten years (or less, if the conditions warrant a shorter amortization period).
On an ongoing basis, public companies — and private companies that don’t elect the alternate accounting treatment — must test unamortized intangible assets at least annually for impairment. This occurs when the asset’s fair value falls below its carrying value on the balance sheet. Impairment testing also may be required when a triggering event happens, such as the loss of a major customer or introduction of new technology that makes the company’s offerings obsolete.
Property Tax Issues
In most cases, the local government collects property taxes on a business’s real estate and certain types of tangible property, such as equipment. But intangibles — such as brands, licenses, contractual rights and proprietary technology — may be specifically exempt from property taxes.
Companies can use an appraisal of these assets to petition for a lower assessed value. Separating tangible and intangible asset values can significantly lower a company’s property tax bill, particularly if it generates income from real property, as do luxury golf courses, recreation facilities and resorts.
Disputes over intangible asset rights — such as patent infringement or breach of contract — often require a valuation of intangible assets and/or lost profit analysis. The value of intangibles also comes into play in minority shareholder disputes that result in statutory appraisal actions and divorce cases. In theory, if a business owns intangible assets, they should be included in the value it awards to minority shareholders.
And the value of goodwill can be a major sticking point in states that specifically include (or exclude) portions of this intangible asset when splitting up a marital estate.
Regardless of the intangible asset or your reason for valuing it, be sure you work with a qualified professional, such as the Valuation Team at MFA, for these hard-to-value assets. Contact us today to learn more.