Coca-Cola listed its intangible assets at $8.6-billion on its 2010 balance
sheet, but it was determined they were actually worth $70.4-billion.
The process begins with a SWOT analysis, which examines the strengths, weak-nesses, opportunities and threats facing
the company. Transactions between other
players of similar size should also be included to get an indication of what the market
is willing to pay, he says.
Valuators need to dig down into the
comparable transactions to ensure they’re
meaningful, in much the same way that
real estate experts would examine a pair
of similar houses. If the home next door
sells for $1-million, it doesn’t mean your
home will fetch the same amount, even
though it’s the same size and was built in
the same year.
“The sold house may have had new
plumbing put in with gold and marble fixtures,” Wise says.
Assigning dollar values to intangible assets
is typically based on what they can earn, he
says. Generally, there are three approach-es — income, market and avoided cost.
The income approach is the present
value of future benefits derived from the
intangibles, such as patents, processes or
technology.
The market approach looks at guideline transactions. If a similar brand sold
in the open market, it should provide a
good indication of what your company
would fetch.
The third is sometimes called the “relief
from royalty” method. If you own a patent
or a certain technology or process, it looks
at how much you would have had to pay
in royalty fees if you didn’t own it.
Another way of valuing the intangibles,
Wise says, is to take the total earnings
of the business, subtract the earnings attributable to the tangible assets and what
remains are the earnings attributable to
the intangibles.
Where the real complexities arise is
in the intangibles and their considerable
earning power.
There may be situations where the
buyer could acquire the target business
and achieve significant synergies with
the business it already operates. In these
cases, the seller should negotiate for more
pecial purchase premiums can
range from 10 to 100 per cent.
A competitive bidding pro-
cess for a company that has
high intellectual property values can drive
the price “way up,” he says.
If the buyer believes there are $20-mil-
lion worth of synergies and benefits to
come from an acquisition, they’ll be willing
to pay something less than $20-million.
“That’s where the negotiation comes
in,” he says.
In most transactions, both sides have a
good idea of what the technology in play
is worth, says Helmut Hauke, a Calgary-
based certified general accountant spe-
cializing in the energy sector. If a seller
believes a potential buyer is undervaluing
the technology or intellectual property in
a material way, they will often exclude it
from the transaction, he says.
“One way that companies can ensure
they get the best value for their intellec-
tual assets and technology is considering
splitting the total asset into pieces. It’s the
same methodology that a holding compa-
ny that owns fast-food restaurants would
use when they sell the Burger King and
keep the KFC,” he says.
Many entrepreneurs have only the
slightest idea what the technology they
have developed in-house is actually
worth. They know what it cost to develop
in terms of human and other resources
but they might not have a clue what it’s
worth to a potential suitor who is looking
to leverage it. That’s when would-be sellers should bring in business evaluators,
S
than the standalone value of the business,
he says.
“It’s like one plus one equals three if
there are such synergies or they’re such a
strategic fit. If it has much more value in
the hands of a strategic buyer, they’ll pay a
premium over and above the stand-alone
intrinsic value of the target. They’ll be
able to eliminate costs, realize economies
of scale, plus they’ve eliminated a competitor,” Wise says.
Hauke says. It’s highly unlikely that negotiators on both sides, if asked to write
down a number on the back of a napkin,
would come up with the same figure
when valuing intellectual property assets — and that’s completely understandable, Hauke says.
“The buyer is usually seeing something
in the [seller] that the seller isn’t aware of.
Maybe there is some land that has more
[energy] reserves than the seller is aware
of. The buyer thinks they have a little
more information from doing business intelligence and research,” he says.
“If there was no disparity, we would
have no transactions. It would always be
a zero-sum game.”
Coke, at Taylor McCaffrey in Winni-
peg, says one alternative to bringing in
auditors is for business owners to simply
be on top of the technology they have
available and the opportunities that re-
late to it.
He says if there is even a sliver of doubt
about the value of a technology that a
company has developed, executives need
to take whatever steps possible to get a
real grasp of the situation before entering
into any kind of sale discussion.
The entire process is no different than
a typical consumer transaction where the
buyer is looking for a bargain and the seller is looking for a premium, he says.
“From a vendor’s point of view, you
have to think about how you can explain
your technology in way that’s hard for a
buyer to discount or ignore,” he says.
If that approach isn’t taken, it’s entirely
possible that the assets could be significantly undervalued when the deal is finally consummated, he says.
“There could be a great deal of money
left on the table if there is technology
that has the potential to expand significantly and produce phenomenal financial
results if given time to unfold and mature,” he says.
“If you’re able to look at your technology as a cash-flow stream and you see a
significant value flowing from that, then
you can push the envelope.” END
