Archive for February, 2013

To answer this question requires a judgment call. Each company needs to make a decision whether to disclose the values of its intangibles depending on its set of circumstances.

Under the Generally Accepted Accounting Principles (GAAP) the firms should make available all information that helps investors and creditors understand and forecast future cash flows – the essential input into business valuation.

So the question really is: will the knowledge of intangible asset values help you project the future cash flows with greater accuracy?

Creditors, shareholders and potential investors are likely to be interested in any intangible assets the company owns and especially those that are undervalued. This becomes even more important if the intangible can be separated and sold or licensed to others. Consider a brand name or a valuable trademark that can generate considerable additional revenue stream from royalty payments.

Trained and assembled workforce may not be severable like a brand name, but its value to the success of the company is pretty obvious. Many investors would like to know just how valuable the key staff members are especially if the company is to be sold and some of the employees may require incentives to be retained.

Note that, just like the business value itself, values of intangible assets can go up and down. Business owners and investors may well want to know how the values of such intangibles are affected by the company’s overall performance.

If you want to attract investor interest in a growing company with considerable internally developed intangible assets such as intellectual property, disclosing this information in a clear and convincing way is a good thing.

Much of intangible asset valuation is part art and part science. So a big picture view of what the key intangibles are worth is the first step toward making the disclosure. The idea is to inform the interested parties about valuable possessions that the company can bring to bear in order to grow and increase in value.

In the US the Internal Revenue Service has laid out the expectations for what the tax authorities look for in business valuations. Here is the list:

  • The nature of the business and its history
  • The book value of the company stock and its financial condition
  • The dividend paying ability of the firm
  • The presence of goodwill and other intangible assets
  • Sales of company stock, sizes of stock blocks to be valued
  • Market price of stock of companies in the same line of business whose stock trades freely on the open market

Most professional business appraisers pay close attention to the above requirements when preparing their valuations. The points are given some attention in the business valuation report that follows.

For privately owned companies, some of the points are less relevant, e.g. the dividend paying capacity. This is because private companies like to avoid the taxation burden that paying dividends brings.

In this case, the tax authorities are typically interested in the business cash flow outlook. So a realistic earnings forecast is useful both for your income-based business valuation as well as meeting the level of transparency expected of a well thought out business appraisal.