In today’s knowledge-based economy, intangible assets such as intellectual property, brand reputation, and customer relationships are the main contributors to business value. Quite impressively, these assets currently make up close to 90% of the market value of S&P 500 companies—a dramatic change from only 17% in 1975. Determining the value of such assets involves different valuation methods—specifically, income, market, and cost approaches—that take into account the economic benefits expected to be derived in the future.
For entrepreneurs, knowing the value of intangible assets is essential. It helps you understand the true worth of your company, make smarter strategic decisions, and earn the trust of investors. This article will walk founders through the main types of intangible assets and show how to assess their value effectively.
Understanding Intangible Assets and Their Importance
Intangible assets refer to non-material resources, such as patents, trademarks, copyrights, software, data, customer relationships, and brand names, which are the major contributors to a company’s cash flow and enterprise value. They are different from tangible assets in that they do not have a physical form; however, they can still provide the business with positive economic results in the long run.
The correct valuation of intangible assets is crucial for founders and investors to determine how to wisely allocate funds, comply with regulations, and grow strategically. Additionally, their valuation lies at the core of many business activities, such as mergers and acquisitions, tax planning, intellectual property licensing, resolving legal disputes, and conforming to financial reporting standards, e.g., GAAP and IFRS.
Types of intangible assets
Intangible assets, while they do not have a physical form, are incredibly important for businesses. Here are some common types:
- Trademarks: A company’s unique features—like its name, logo, tagline, or overall design—act as trademarks. They show customers where the products or services come from and help them stand out from the competition.
- Patents protect: Patents provide the sole right to use an invention or process for a limited period, thereby prohibiting any unauthorized use.
- Copyrights: Legal rights to control the reproduction and distribution of creative works, software, or publications.
- Goodwill: Value derived from reputation, customer loyalty, workforce, and synergies in the case of acquisitions or mergers.
- Franchises: Permission to manage a business under the brand of a franchisor, adhering to its system and regulations.
- Licenses: Legally authorized access to the use of technology, software, or areas that give certain economic and usage rights.
- Trade secrets: Confidential information, formulas, or methods that allow the company to have a competitive advantage and provide cost or performance benefits.
How to Determine the Value of Your Intangible Assets
Intangible assets can be valued by three major methods:
1. Income Approach
The income method estimates value based on the present value of expected future economic benefits (such as cash flows or royalty savings) attributable to the asset. It is particularly useful when intangible assets are key drivers of revenue or have a measurable impact on unit economics. Common methods include:
A) Relief from Royalty Method
Estimates the value of the asset based on the hypothetical royalty savings that the company avoids by owning and not licensing the IP. This involves estimating the amount of revenue, applying a royalty rate determined by the market, adjusting for taxation, and discounting the after-tax savings over the useful life.
This method is usually applied when the intangible asset is the main factor for revenue generation and there are similar royalty rates available in the market (for instance, trademarks, software, patents).
Here is a step-by-step process:
- Identify the Asset: Decide which intangible asset needs valuation, for instance, a patent, trademark, or brand.
- Select a Royalty Rate: Locate a suitable market royalty rate for comparable assets within your sector.
- Estimate Future Revenue: Make a projection of the revenue that the asset is expected to generate during its useful life.
- Calculate Annual Royalty Savings: Take the projected revenue and multiply it by the royalty rate to get the annual royalty savings.
- Choose a Discount Rate: Choose a discount rate that mirrors the risk associated with the asset’s cash flows.
- Discount Royalty Savings: Determine the present value of the annual royalty savings.
- Adjust for Taxes: Calculate after-tax savings by applying any applicable taxes.
- Sum the Values: Calculate the total asset value by adding the discounted annual savings.
Example
For a purchase price allocation, SkyWave Electronics is determining the value of its brand by the following parameters: projected annual revenue of $1,000,000, a royalty rate of 5%, an 8 percent discount rate, and an estimated useful life of three years. The tax effects are already taken into account in the royalty savings.
| Year | Projected Revenue | Royalty Rate | Royalty Savings | Discount Factor (8%) | Discounted Savings |
| 1 | $1,000,000 | 5% | $50,000 | 0.925926 | $46,296 |
| 2 | $1,000,000 | 5% | $50,000 | 0.857339 | $42,867 |
| 3 | $1,000,000 | 5% | $50,000 | 0.793832 | $39,692 |
| Total PV | – | – | $150,000 | – | $128,855 |
Brand Value (PV) = $128,855
B) Multi-Period Excess Earnings Method (MPEEM)
Separates the cash flows that can be attributed to a core intangible (e.g., core technology or customer relationships) after contributory asset charges and is discounted at an asset-specific rate.
This method is used in situations where a single intangible asset is the primary source of value, while the supporting assets contribute only to a small extent—this is typical for customer relationships, key technologies, and contractual assets.
Here’s a step-by-step process with an example:
- Identify the Core Intangible Asset: Decide which intangible asset is the main source of value, for example, a core technology, a customer relationship, or a contractual right.
- Project Total Cash Flows: Calculate the total cash flows that are expected to be generated by the business or asset in the future over the period of its useful life.
- Deduct Contributory Asset Charges: Deduct expenses for other assets that help in creating revenue, for example, the workforce, fixed assets, and working capital.
- Determine an Asset-Specific Discount Rate: Choose a discount rate that indicates the risk and the anticipated return of the main intangible asset.
- Discount Excess Earnings: Figure out the present value of the excess earnings that can be attributed to the core intangible.
- Adjust for Taxes (if applicable): If there are any applicable taxes, make sure to factor them in to get the after-tax value.
- Sum the Values: Establish the total value of the core intangible asset by adding the discounted excess earnings over the asset’s useful life.
Example
HealthBridge Diagnostics is aiming to figure out the worth of its customer contracts under a PPA. If there are additional profits of $200,000, $190,000, $180,000, $170,000, and $160,000 for the coming five years, and a discount rate of 12% is used, the present value of these profits can be worked out to find the contract value.
| Year | Excess Earnings | Discount Factor (12%) | Discounted Excess Earnings |
| 1 | $200,000 | 0.892857 | $178,571 |
| 2 | $190,000 | 0.797194 | $151,467 |
| 3 | $180,000 | 0.711780 | $128,120 |
| 4 | $170,000 | 0.635518 | $108,038 |
| 5 | $160,000 | 0.567427 | $90,788 |
| Total PV | – | – | $656,985 |
Customer Relationship Value (PV) = $656,985
C) With and Without Method
Compares two scenarios—business performance with the asset and without the asset—to isolate the incremental cash flows. The difference between the two is then valued using the DCF method.
This method is typically used in cases of non-compete agreements, lawsuits, or financial conflicts in which the separation of the exact contribution of an asset is required.
Here’s a step-by-step process with an example:
- Identify the Asset: Decide on the intangible asset for which you want to assess the impact.
- Project Cash Flows With the Asset: Estimate the business’s cash flows that will be available in the future if the asset is kept in use.
- Project Revenue Without the Asset: Make a forecast of the business cash flows for the upcoming years if the asset remains idle.
- Calculate Incremental Cash Flows: Subtract the cash flows “without asset” from the cash flows “with asset” to get the benefit that can be attributed to the asset only.
- Choose a Discount Rate: Choose a proper discount rate that would show the risk associated with the incremental cash flows.
- Discount Incremental Cash Flows: The discount rate should be used to determine the present value of the incremental cash flows.
- Sum the Values: Sum up the discounted incremental cash flows to get the overall value of the intangible asset.
Example
GreenFuel BioEnergy is looking to value a regulatory permit as collateral for a loan. In the case that the license leads to annual cash flows of $500,000 and there are $350,000 cash flows without it, the difference in cash flow of $150,000 a year for five years can be discounted at a rate of 10% to find out the present value of the permit.
| Year | Incremental Cash Flow (With − Without) | Discount Factor (10%) | Discounted Increment |
| 1 | $150,000 | 0.909091 | $136,364 |
| 2 | $150,000 | 0.826446 | $123,967 |
| 3 | $150,000 | 0.751315 | $112,697 |
| 4 | $150,000 | 0.683013 | $102,452 |
| 5 | $150,000 | 0.620921 | $93,138 |
| Total PV | – | – | $568,618 |
License Value (PV) = $568,618
D) Greenfield Method
This method works on the premise that the subject intangible is the only asset initially owned and then depicts the creation or purchase of all other necessary assets over time, thereby separating the intangible’s share in the total value.
Such a method is generally employed in the case of franchise rights, controlled licenses, and other assets in which the intangible is the main source of value.
Here’s a step-by-step process with an example:
- Identify the Intangible Asset: Figure out the asset that you want to separate from its contribution to the value.
- Assume Ownership of Only the Intangible: Model a scenario where the only asset initially owned is an intangible.
- Project Required Supporting Assets: Calculate the worth or expense of all ancillary assets (physical or non-physical) that are necessary for the business to function properly.
- Allocate Cash Flows: Break down the revenues or profits resulting from the use of the intangible and supporting assets, i.e., separate the contribution of the intangible.
- Choose a Discount Rate: Choose a suitable rate that corresponds to the risk linked with the intangible’s cash flows.
- Discount Intangible’s Share: Calculate the current worth of the cash flows that can be attributed to the intangible asset.
- Sum Values: Combine the discounted cash flows to find the overall worth of the intangible asset.
Example
NeuroLink AI Systems is keen on determining the stand-alone value of the company as part of its investment decision. Assuming free cash flows of −$600,000 in Year 1 (for the business build-up), $250,000 in Year 2, $450,000 in Year 3, and $700,000 in Year 4, with a discount rate of 12%, the present value of these cash flows can be calculated to estimate the company’s stand-alone value.
| Year | Free Cash Flow | Discount Factor (12%) | Discounted FCF |
| 1 | −$600,000 | 0.892857 | −$535,714 |
| 2 | $250,000 | 0.797194 | $199,298 |
| 3 | $450,000 | 0.711780 | $320,301 |
| 4 | $700,000 | 0.635518 | $444,863 |
| Total PV | – | – | $428,748 |
Greenfield Value (PV) ≈ $428,748
2. Market Approach
The Market Approach determines the value of an intangible asset through the comparison of similar transactions, licenses, or market deals while making the necessary adjustments for differences in scope, market, exclusivity, and useful life. This method is referred to as a comparables-driven Relief from Royalty/Market (RFRM) technique as well.
Normally, this method is employed when there is enough market data or similar licensing transactions for comparable intangible assets.
Here’s a step-by-step guide with an example:
- Find Comparable Transactions: Find similar license agreements or datasets on the purchase price allocation of similar brands or technologies in comparable geographies and sectors.
- Extract Market Data: Pull observed royalties, fee structures, and useful lives; determine profitability correlations and deal context (distress, litigation, strategic premium).
- Determine Notional Royalty Rate: Bring to a notional royalty rate on the subject matter asset, based upon brand strength, margins and exclusivity; record adjustments in an open manner.
- Apply Rate: Multiply the selected rate by the forecast revenue of the subject and discount (as in RRM), or observe price multiples directly when the prices of full asset sales are hard to predict.
- Reconcile: Reconcile with other methods when the data is sparse or comparability is imperfect, noting the typical weakness of the thin, confidential market in transactions involving intangibles.
Example
UrbanStyle Apparel is seeking to determine the fair market value of its brand by using the Market Approach. They found a similar brand that was sold recently for $200,000. Since the brand of UrbanStyle is rated as being 10% better, a 1.1 adjustment factor is used to get the adjusted market-based estimate of value.
| Item | Value |
| Comparable Trademark Sale Price | $200,000 |
| Adjustment Factor (brand stronger: 1.1) | 1.1 |
| Adjusted Market Value | $200,000 × 1.1 = $220,000 |
Trademark Value (Market Approach) ≈ $220,000
3. Cost Approach
The cost method values the asset according to the cost of replacing the utility of the asset at that time, less the physical, functional, and economic obsolescence; it is most applicable when the benefits are difficult to separate, the initial R&D stages are predominant, or market data does not exist.
Here’s a step-by-step guide with an example:
- Identify Modern Equivalent Asset: Identify a modern equivalent asset that delivers the same utility (not necessarily identical), and scope direct and indirect costs required to recreate it (engineering, R&D, regulatory, branding, and data curation).
- Include Opportunity and Carrying Costs: Add opportunity cost and carrying cost in time-to-build (e.g., working capital and risk-adjusted return on investment during the development process).
- Subtract Obsolescence: Subtract functional (reduced features), technological (outdated stack), and economic (shift in demand or competitive pressure) obsolescence to represent reduced utility.
- Include Tax and Profit Benefits: If applicable to a buyer, include the amortization benefit of tax and a developer’s profit margin to depict expected returns on investment by market participants.
- Compare with Market Performance: Compare with income or market performance after cash flow or similar data have improved, to avoid under- or overestimating economic value.
Example
FinCore Payments is a company that is willing to know the value of its internally developed software for a properly done impairment test. The company, by using a cost approach, decides the software replacement cost first and then subtracts all kinds of obsolescence, i.e., functional and economic, to figure out the value.
| Item | Amount (USD) |
| Development Cost (replacement) | $800,000 |
| Less: Functional Obsolescence | ($100,000) |
| Less: Economic Obsolescence | ($50,000) |
| Replacement-Cost Value | $650,000 |
Replacement-Cost Value = $800,000 − $100,000 − $50,000 = $650,000
Important Considerations in Intangible Asset Valuation
It is fundamental to scope life, rights, and risk drivers appropriately to have credible valuations that would pass audit, tax reviews, and negotiations.
- Economic Life: Model the lesser of law and economic life, which represent change in technology, churn, and brand decay; align the forecast horizon with this.
- Legal Protections: High enforceability, extent, and term of existence (patent claims, trademark registrations, and exclusivity of a license) minimize risk and facilitate greater values.
- Market Environment: The sustainability of the revenue and royalty rates and benchmark pricing depends on sector growth, pricing power, and the existence of substitutes, which affects the choice of rate and the discounting.
- Competitive Edge: These are unique functionalities, network effects, or costs affecting incremental cash flows in with and without earnings models.
- Risk Consideration: Asset-related risks like legal issues, obsolescence, loss of customers, and concentration are the types of risks that should be reflected in the discount rates, and in many cases, they are higher than corporate WACC.
FAQs on Valuing Intangible Assets
Here are some frequently asked questions on valuing intangible assets:
What are the main challenges in identifying and valuing intangible assets?
Subjectivity is often involved in the valuation of intangible assets, particularly when it comes to projections of future cash flows, royalty rates, useful life, and the absence of comparable market data. Expert knowledge is very important to achieve results that are reliable and can be defended.
How often should businesses revalue their intangible assets?
Businesses should perform intangible asset revaluation once a year.
How do IFRS or GAAP treat intangible assets differently?
IFRS allows fair-value revaluation (when an active market exists), capitalization of development costs, and impairment reversals except for goodwill. US GAAP prohibits revaluation, is more stringent in capitalizing development costs, and does not allow impairment reversals. Both standards require amortization of finite-lived intangibles and annual impairment testing for indefinite-lived assets and goodwill.
How do intangible assets help strengthen a company’s competitive edge?
Brands and trademarks support premium pricing and loyalty, patents and exclusive licenses create barriers to entry, and proprietary technology and data increase operating leverage—all of which raise durable cash flows and reduce risk in valuation models. These effects extend useful life assumptions and can justify higher valuation multiples in capital markets and M&A.
How are intangible assets recorded in financial statements?
Accounting standards dictate that intangible assets acquired externally can be capitalized and amortized on the balance sheet. On the other hand, those that are internally developed are most of the time expensed and only reported in limited cases.
How can founders leverage intangible assets in negotiations, fundraising, and valuation reports?
One way founders can leverage intangible assets is by demonstrating how their technology, brand, data, or customer relationships differentiate them from competitors and drive long-term revenue. They can also quantify these assets using user metrics, IP portfolios, traction data, or valuation methods. This helps strengthen fundraising pitches, justify higher valuations, and improve leverage when negotiating deal terms.
Which assets are commonly valued using these methods?
These valuation methods are used to figure out the value of intangible assets, which may include trademarks, patents, copyrights, customer relationships, software, and brand names.
Why work with valuation experts?
Valuation experts help the company arrive at accurate and trustworthy numbers, which is especially important when assumptions such as future cash flows or royalty rates are subjective.
Maximize Your Startup’s Value with Reliable 409A Valuations
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