Intangible assets – things like brands, patents, data, and employee knowledge – have become massively important for businesses today. In the past, tangible assets like factories, equipment, and inventory drove company value. But in our modern, technology and information-driven economy, intangible assets are often far more valuable than physical things. Despite this shift, many companies still don’t properly identify or assess the value of their intangible assets. This leads to inaccurate valuations and poor strategic choices. Appraising intangibles accurately matters for mergers and acquisitions, licensing deals, lawsuits, financial reporting, and more. In this article, we’ll look at what intangible assets are, why appraising them matters, the main intangibles companies should value, valuation methods, challenges appraisers face, and the importance of using qualified experts. Read on to understand why intangible asset appraisal is so critical in the 21st century economy.

What are Intangible Assets?

Intangible assets are non-physical things that provide value to a company, like brands, intellectual property, data, and talent. They contrast with tangible assets like property, equipment, and inventory that have a concrete physical existence. Some common intangible assets include:

– Brand value – The reputation, visibility, and emotional connections a brand has.

– Intellectual property – Things like patents, trademarks, copyrights, and trade secrets that give market advantages. 

– Goodwill – Loyal customers, talented staff, and other “uncountable” assets.

– Data and analytics – Customer data, operational data, and the insights gained.

– Human capital – The skills, knowledge, and abilities of a company’s workforce.

– Customer relationships – Links to loyal, high-value customers.

– Licenses and permits – Government licenses that grant exclusivity.

While you can’t touch or feel intangible assets, they can represent huge value. In our increasingly knowledge-based economy, a company’s intangible assets are often far more valuable than old-school physical things.

Why Appraise Intangible Assets?

There are some key reasons proper intangible asset appraisal has become so important:

Mergers and Acquisitions – When one company buys another, all acquired assets must be valued – both tangible and intangible. Brands, intellectual property, and goodwill often make up much of the purchase price.

Licensing Deals – To license intellectual property like patents, companies must determine a fair licensing fee through valuation.

Lawsuits – In legal disputes over ventures, mergers, etc., plaintiffs and defendants fight over intangible asset values. Independent appraisals establish fair values.

Financial Reporting – Accounting rules require listing certain intangibles like patents on balance sheets. Appraisals provide the market values for this.

Strategic Planning – Appraisals help managers identify their most valuable intangibles to guide investment decisions. 

Raising Capital – Investors and lenders will assess a company’s intangibles when deciding how much capital to provide.

Accurately appraising intangible assets is crucial for getting a true valuation of a modern company. It’s not something that can be ignored.

Key Intangible Assets to Appraise

While every company has a unique mix of intangible assets, there are some that most commonly get appraised:

Brand Value 

A company’s brand – its reputation, visibility, and customer sentiment – is often its most valuable intangible asset. Strong brands allow premium pricing, drive sales, and build loyalty. Appraisers value brands using methods like analyzing price premiums, estimating royalty savings, and scoring brand strength.

Intellectual Property

Intellectual property (IP) like patents, trademarks, copyrights, and trade secrets provides competitive advantages and recurring revenues. Patents and secret formulas deliver proprietary products/processes. Trademarks cement brand names. Copyrights enable profitable creative works. Appraisers value IP by analyzing documented costs, replacement costs, or projected earnings.

Goodwill 

Goodwill represents vague assets like customer loyalty and talented staff that you can’t count on a balance sheet. It arises in acquisitions when the price paid exceeds tangible asset value, indicating extra “intangible” value. Appraisers view goodwill similarly to brand value.

Data and Analytics

In our information economy, data is an increasingly strategic asset. Companies accumulate customer, operations, and other data, using analytics to turn raw data into insights. Appraisers look at factors like data uniqueness, competitive advantage provided, and projected revenues.

Human Capital 

A skilled, knowledgeable workforce is absolutely vital for executing on strategy. Companies pour resources into hiring, training, and retaining talent. Appraisers value human capital by analyzing factors like profit contribution, replacement costs, and market salary rates.

Customer Relationships

Ongoing links to loyal, high-value customers hold tremendous value. Appraisers look at historical retention rates, customer lifetime values, switching costs, and more. Common valuation methods include excess earnings, distributor models, and mass asset techniques.

Licenses and Permits

Government licenses granting monopolies or exclusive access to markets can be hugely valuable intangibles. Appraisers assess licenses based on exclusivity provided and profits enabled.

Methods for Appraising Intangible Assets

Skilled appraisers use established approaches to value intangible assets. The three main methods are:

Cost Approach

This estimates an asset’s value based on how much it cost to develop, acquire, or replace. Historical or reproduction costs are analyzed. This works well for recently created, documented assets, but declines in relevance over an asset’s lifespan.

Market Approach  

This analyzes sale prices achieved for comparable assets to estimate value. It’s effective if an active market exists, like for customer lists or software. If no comparables exist, market method offshoots like royalty savings can be used.

Income Approach

This analyzes an asset’s income-producing potential. Appraisers project future revenues driven by the asset, deduct costs and expenses, then discount projected cash flows to present value. This works well for assets like patents where value lies in generating income.

In practice, appraisers often blend multiple approaches to derive well-rounded intangible asset values, overcoming limitations of individual methods.

Challenges in Appraising Intangible Assets

Despite established approaches, intangible assets pose distinct challenges:

– Lack of Observable Data – Unlike tangible assets, observable sales data or rental rates rarely exist for intangibles. This forces more dependence on estimates and assumptions.

– Long Time Horizons – Intangible assets often have very long useful lives. Forecasting cash flows over extended periods increases uncertainty.

– Difficulty Separating Value – Many intangibles work together to create value, making it hard to isolate the impact of a single asset. Brand power, for example, mixes with customer loyalty and talented marketing teams.

– Changing Competition – New technologies, entrants, etc. can rapidly alter the competitive benefits of intangibles, risking projected revenues not materializing.

– Inconsistent Reporting – Companies define and account for intangibles differently, reducing cross-firm comparability. 

Still, experienced appraisers can apply their judgment to properly value intangible assets in most situations despite these challenges.

Importance of Using Qualified Appraisers

Properly appraising intangible assets requires specialized expertise across complex disciplines – intellectual property law, valuation standards, economics, accounting, finance, and more. Companies should look for appraisers having:

– Relevant credentials – Such as the ASA’s Accredited Valuation Analyst (AVA) or Accredited Senior Appraiser (ASA) designations, which require extensive intangible asset valuation education and testing. 

– Hands-on experience – Especially valuing the specific types of intangibles at hand. Appraisers build expertise through years of real-world engagements.

– Industry knowledge – To understand competitive dynamics influencing intangible values.

– Independence – Appraisers shouldn’t have other financial stakes in the assets being valued to avoid bias.

Using qualified, seasoned appraisers provides confidence intangibles are properly valued for deals, litigation, and reporting. This prevents faulty analyses that could significantly impact mergers, stock prices, earnings, and more.

Conclusion

Intangible assets now make up the majority of value for many businesses. Despite past challenges measuring intangibles, appraisers have developed sound valuation approaches leveraging costs, markets, and projected earnings. Brands, intellectual property, data, talent, customer relationships, and other intangibles can now be reliably valued. However, proper intangible asset appraisal requires significant judgment and experience. For transactions, lawsuits, or financial reporting, companies should work with credentialed valuation professionals. Accurately assessing intangible value drivers provides the foundation for wise strategies and fair treatment of stakeholders. With trillions in intangible asset value at stake globally, appraisers have immense responsibility to rigorously value these intricate assets so crucial to 21st century enterprises.