Page 7 - Asset Valuation

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Asset Valuation | Monday, May 16, 2016 | S7
er, where assets are not actively bought, sold, licensed, or otherwise traded, it becomes necessary to engage an experienced valua- tion professional to analyze and make adjust- ments to identified comparable asset values in order to arrive at an appropriate value for the asset being evaluated. of importance in the market approach is the process one uses to identify the comparable assets. The context in which the comparable asset or transaction occurred may render the asset or transaction not at all comparable. In addition, differences in significant financial variables, risks and prospects must also be analyzed. In spite of these challenges, this approach can provide a reliable method for determining fair value.
Income Approach: The income approach is based on the present value of the future earn- ings or cash flow expected to be generated by the assets. Under the discounted cash flows method, earnings or cash flow projections provided by the business for a future period are discounted at a rate commensurate with the degree of risk associated with the assets of the business. A residual or terminal value is also added to the present value of the earn- ings or cash flow to quantify value beyond the projection period.
When practical, value is determined utiliz- ing several of the methodologies described above in order to establish greater reliability of fair value.
Legal Considerations
There are numerous legal considerations
When practical, value is determined utilizing several of the methodologies in order to establish greater reliability of fair value.
royalty charges.
The approach one uses to determine fair
value of IP assets is based on a consideration of the following four factors: (1) the unique- ness of the asset involved; (2) data availability and verifiability regarding the asset; (3) the context or purpose for which the valuation is performed; and (4) the experience of the analyst conducting the valuation.
Legal Considerations
Patents and copyrights are not defined by physical characteristics as in the case of tan- gible assets. As such, the valuation of patents and copyrights must take into account cer- tain legal considerations that focus on three principal overlapping concerns:
(1) The scope and limitations of the rights represented by the patent or copyright;
(2) The ownership, control and enforce- ability of those rights; and
(3) The potential liability for third-party infringement claims.
Questions surrounding any of these basic points can diminish the value of a patent or copyright.
Scope and Limitations: In many ways, a determination of the scope and limitations of a patent or copyright will lead to an under- standing of the breadth of a holder’s right to operate under the relevant patent or copy- right while, at the same time, excluding others from doing so.
Patents. Assessing the scope of a patent begins with a thorough review of » Page S10
that can impact the valuation of tangible assets. In the case of fixed assets consist- ing of PP&e, one should consider, first and foremost, whether the assets are owned or leased. In the case of owned real estate and buildings, it is critical to understand whether there are any defects in the chain of title, any adverse interests or any consensual or statutory liens. Whether leased or owned, a review and inspection of the PP&e should be undertaken as part of the valuation process to determine the condition of the properties and whether they comply with applicable laws. To the extent manufacturing facilities have not been inspected, or are determined not to comply with all zoning, health, safety and environmental regulations, the value of those assets may be adversely impacted. For example, in valuing a facility subject to unremediated environmental conditions, esti- mated clean-up costs and/or liability exposure will directly affect valuation.
With respect to current assets, such as inventory, it is important to determine whether the assets are owned or held on consignment for sale and, if owned, whether the assets are subject to third party claims. valuing inventory which is owned but subject to a third-party lien or security interest will
need to take account of the amount of the obligations secured by the lien. Consigned goods may have value based upon sale mar- gins, but, obviously, will not be valued in the same manner as inventory that is owned.
Valuation of Patents and Copyrights
Valuation Methodologies
valuing intellectual property (IP) assets including patents and copyrights requires that one: (1) identify the IP assets and (2) assign a justifiable value to the identified IP assets. By their very nature, IP assets comprise intan- gible assets that are not as readily identifiable as a company’s tangible assets.
In addition to the cost, market and income methodologies described above, IP assets may also be valued using a relief from royalty approach. In the relief from royalty approach, a hypothetical situation is created to estimate what an entity would pay to license its own intellectual property assets in an arm’s-length transaction. The royalty rates used in this approach can be taken from one of several commercially available databases that accu- mulate terms from a multitude of licensing agreements. The value is then calculated as the present value of the avoided hypothetical
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