Understanding Valuation Methods of Intangible Assets
Understanding Valuation Methods of Intangible Assets:
The Multi-period Excess Earnings Method (MEEM)
Intangible assets are often difficult to value. In many cases, it is not well-defined how they should be valued or what method is appropriate. This article will discuss the multi-period excess earnings method (MEEM) and how it values intangible assets.
Several potential issues can arise when using MEEM, so it is essential to hire a qualified valuator, indicated by the CBV designation, to understand particular problems and how they may impact your valuation.
What Is MEEM and Why Is It Used to Value Intangible Assets?
The MEEM is a popular method for valuing intangible assets. It is relatively simple to use and considers only the revenues generated from the use of the asset. The steps involved in using MEEM to value an intangible asset are as follows:
- First, the valuator must review a cash flow forecast for the asset that has been developed by management. This forecast should include only revenues generated directly from the use of the asset. It is important to note that MEEM only captures the revenue streams directly associated with the use of the asset.
- Next, an estimate of future tax earnings is developed. This estimate is based on the cash flow forecast and considers the tax treatment of the asset being valued.
- Once the estimate of future tax earnings is developed, the cash flow forecast must be adjusted for contributory asset charges in every year of the forecast for which the charges are deemed relevant. Contributory asset charges are expenses incurred as a result of the use of the asset being valued. For example, if you are valuing a patent, the contributory asset charges would be the costs of filing and maintaining the patent, as well as the working capital or fixed assets of the business that are utilized to generate the projected cash flows specific to the intangible asset.
- After the cash flow forecast has been adjusted for contributory asset charges, the present value of the future tax earnings is calculated using a discount rate that reflects the risk associated with the asset being valued.
- The present value of the future tax earnings is then used to determine the value of the intangible asset.
There are several situations in which MEEM is suitable for valuing intangible assets:
- There is a long history of financial data available.
- When the future cash flows from the use of the asset can be reasonably estimated.
- When the asset being valued is expected to generate revenues for an extended period.
Branding and Trademarks
Branding and trademarks are intangible assets that can significantly impact a company’s bottom line. Branding uses a name, logo, or other marketing tools to create an image or identity for a product or company.
A trademark is a legally protected symbol, name, or slogan used to identify a product. Trademarks can be extremely valuable, and MEEM can be used to understand that value.
Customer Contracts and Relationships
One common type of intangible asset that is valued using MEEM is customer contracts and relationships. This type of asset is often difficult to value because it is not always clear how long the contract will last or what revenue it will generate. However, if there is a long history of financial data available for the asset being valued, MEEM can be used to estimate the future cash flows from the contract and determine its value.
Intellectual Property and Technology
Another type of intangible asset that is often valued using MEEM is intellectual property. This includes assets such as patents, copyrights, and trademarks. However, intellectual property is often difficult to value because it is not always clear how long the asset will generate revenues.
Technology is another type of intangible asset that can be valued using MEEM. This includes things like software, databases, and websites.
Common Contributory Assets Charges
Several additional, common contributory asset charges should be taken into account when using MEEM to value an intangible asset:
- The costs of filing and maintaining the asset.
- The costs of protecting the asset from infringement.
- The costs of marketing the asset.
- The costs of developing and launching products that use the asset.
- The costs of research and development.
- The costs related to the use of working capital of the organization.
- The costs related to the use of fixed assets of the organization.
When Is MEEM Suitable for Use, and What Are the Method’s Limitations?
MEEM is suitable for valuing intangible assets when there is a long history of financial data available for the asset being valued. As well as when the future cash flows from the use of the asset can be estimated and when the asset is expected to generate revenues for an extended period. However, several potential issues can arise when using MEEM, so it is important for the valuator to understand these matters and how they might impact the valuation.
One potential issue that can arise when using MEEM is that the cash flow forecast may not be accurate. This can happen if assumptions about future cash flows are not realistic.
Another potential issue is that the discount rate used in the valuation may not be appropriate. The discount rate should reflect the precariousness of the cash flows being discounted.
Additional issues that can arise when using MEEM are that the contributory asset charges used in the valuation may not be accurate. These charges are based on the idea that the intangible asset being valued is the only asset contributing to the cash flows. If this is not the case, the charges may not be accurate and should be adjusted accordingly.
Finally, it is essential to note that MEEM is only suitable for valuing intangible assets. It cannot be used to value tangible assets or businesses.
How a Mergers and Acquisitions Firm can Help
If you are considering buying or selling a business, it is important to have a clear understanding of the company’s value. A business valuation firm like Beacon Valuations will help you determine the value of a business, which includes tangible and intangible assets. After a completed transaction, Beacon Mergers & Acquisitions can also derive the Purchase Price Allocation for the acquisition, in order to allow the acquirer to report the intangible and goodwill values on the financial statements. They can also help you negotiate the sale price of a company and find potential buyers or sellers.
At Beacon Valuations, our experienced team can help you with all aspects of buying or selling a business, from valuation to negotiation to find the right buyer or seller. Contact us today to learn more about how we can help you.