Business Valuation Methods

Valuation Practice

Valuation is the practice of estimating a defined monetary value for a single or pooled intangible asset

Valuation processes are performed either for transactional (such as commercial activities) or notational (such as accounting activities) purposes.

Three main approaches to valuation exist (cost, market & income approaches), each of which have specific strengths & weaknesses, and therefore answer different needs

Valuation in practice General

A valuation process is structured in similar manners (tasks), whichever approach (cost, market and/or income) is chosen

The different tasks include for such process• Objective definition• Standard of value selection• Appraised asset description• Valuation date or period selection• Valuation approach(es) selection and related calculations• Results reporting

Always remember that a value is subjective, whereas a price is objective

Datacollection& analysis

Valuation in practice: Cost approach

Cost approach : Measure the value of an intangible asset by taking into account all relevant occurring costs and investments related to the appraised asset

Historic costs : accounting all costs (effective and sunk) directly related to the appraised asset (such as securing, research, development, and licensing-in costs)

Replacement costs : valuing the costs for buying an asset bringing the same utility than the appraised one

Reproduction costs : valuing the costs induced in creating, at the time of the appraisal, a similar asset based on actual knowledge

Cost approach is generally used in situations of high uncertainty and limited information exist

Valuation in practice: Market approach

Market approach : Value consists in the price of a comparable asset in a similar market transaction

Market approach relates to the quantification and adjustment of pricing multiples in order to create theoretical comparable conditions

Lack of active and transparent market for IP transactions and market dynamics have to be taken into account in the process

Valuation in practice: Income approach

Income approach : Measure the value of an intangible asset by reference to the expected and actualized benefits, incomes or saved costs over the remaining life of the asset

Such prospective-based quantification of financial flows needs to take into account various risk-related factors such as

Endogenous : Extend of IP protection, nature of competition, …

Exogenous : Substitute product development risks, maturity of market, …

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