Understanding the value of intangible assets

Intangible assets will for many businesses hold considerable value yet quantifying its value can be challenging.

Intangibles encompass a wide range of business assets including brands, software, patents, trademarks, copyrights, customer relationships, customer contracts, customer lists, data lists, currency and NFTs.

Our valuations and forensics team has seen a significant increase in the demand in intangible valuations as businesses look to both recognise and realise their full value.

Valuations are required for various reasons including accounting disclosure which requires greater recognition of intangibles in business combinations. Intangibles can often be one of the most important and valuable assets within a company, yet the value and importance are often insufficiently understood.

The ONS reported in 2021 that the UK investment in 2019 into intangibles stood at a staggering £168.7bn, £8.5bn higher than the investment into tangible assets over the same period. The largest capitalised intangible assets were computer software and databases. Often companies will not recognise their intangibles separately and sometimes fail to protect them.

For accounting purposes, it is only possible to capitalise certain types of intangibles and this is limited to specific circumstances. As an example, internally generated intangibles such as a brand or a customer relationship cannot usually be recognised on a balance sheet, but if a brand or customer relationship is acquired through the acquisition of a company it can be recognised.

In terms of valuation, valuing intangibles can often be complex and requires knowledge of the business, asset and valuation models. Valuations are often based around income; however, intangibles can often need valuing before a business has generated any turnover or profit. We have undertaken numerous intangible valuations and acted for many clients with interests in the technology sector including software developers, digital media firms, telecoms companies and pharmaceutical and life sciences businesses.

It is important for businesses to understand the value of the assets so they understand the returns and contribution those assets should and could be making.

It is important that valuation teams, like ours, work closely with businesses to assist them in identifying and valuing intangible assets within their organisation. Reasons for valuing intangibles include:

• Accounting requirements for business combinations.
• Transferring the intangibles to another company.
• The sale of a company; the value of a company maybe its net assets which include intangibles.
• Licencing out the intangibles to third parties.
• For strategic purposes.
• To assist with legal disputes.
• Securing finance.

If you need any assistance in valuing intangible assets please do get in touch with  Tom Wacher in the Valuation and Forensic team at Kreston Reeves.