Valuing Your Brand and Other “Soft” Assets

VALUING YOUR BRAND AND OTHER “SOFT” ASSETS

VALUATION 2016 SERIESPremier date: April 29, 2016

Premier Date: April 29, 2016

VALUING YOUR BRAND AND OTHER “SOFT” ASSETS

VALUATION 2016 SERIES

© 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 2

WE WOULD LIKE TO TAKE THIS OPPORTUNITY TO THANK OUR SPONSORS



meet the facultyPANELISTS

Richard Claywell J. Richard Claywell, CPAGary Frantzen Alvarez & MarsalMichael Hobbs, SRA, LEED GA PahRoo Appraisal & Consultancy

MODERATOR Kevin Lane Crowe Horwath LLP


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about this webinarIntangible is defined as something "that represents value but has either no intrinsic value or no material being." The fact that intangible assets are lacking in intrinsic value or material being makes it difficult to pinpoint their value, yet such assets often play an important role in the value of a business. This Financial Poise webinar will help attendees understand how experts go about valuing intangible assets; it covers proper valuation methodologies and explains how to access and use market data sources.

about this series“What is it worth?” A valuation (or appraisal, if you prefer) can be performed on virtually any asset: the equity of a company or options to buy the equity of a company; intangible assets (such as patents and trademarks- or even contingent liabilities); real estate; and any sort of personal property. The concept of valuation permeates the business and legal world for reasons that include investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and litigation, among others. Join some of the leading experts in the country as they discuss- in plain English - the basics and the latest in valuation topics and why valuations of assets can vary so greatly from one professional to another.

As with all Financial Poise webinars, each episode in the series is designed to be viewed independently of the other episodes, and listeners will enhance their knowledge of this area whether they attend one, some, or all of the programs.


episodes in this series

Dates above are premier dates All webinars also available On Demand through West LegalEd Center and Vimeo

EPISODE #1 What’s it Worth: Valuing a Business for Sale1/19/2016

EPISODE #2 Valuing Lost Profits for Litigation Purposes2/26/2016

EPISODE #3 Selecting the Right Valuation Expert3/18/2016

EPISODE #4 Valuing Your Brand and Other “Soft” Assets4/29/2016

EPISODE #5 Bankruptcy Valuation Issues: 5/27/2016Valuation in the Context of a Fraudulent Transfer or Preference Attack



What is a Brand?• A brand is an asset or combination of assets such as a name, term, design,

symbol or other feature intended to differentiate a product or service from those of others. A brand is usually represented by assets that may be subject to copyrights or other legal protection such as trade names, logos, trade dress, trademarks, internet domain names, tag lines, “jingles” and other intangible assets.

• Intangible Assets are nonphysical assets such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities, and contracts (as distinguished from physical assets) that grant rights and privileges and have value for the owner.

• International Glossary of Business Valuation Terms as agreed to by the American Institute of Certified Public Accountants, American Society of Appraisers, Canadian Institute of Chartered Business Valuators, National Association of Certified Valuation Analysts, and The Institute of Business Appraisers

• Thus, a brand is generally a group of assets that would be considered a subset of intangible assets.


Types of Intangible Assets

1. Intellectual Property

(Legally Protected)Patents

TrademarksCopyrights

Trade Secrets

2. Intellectual Assets (Unregistered but Codified)

DrawingsSoftware

BlueprintsDocumentsDatabasesFormulasRecipes

3. Intellectual Capital (Uncodified Human and Organizational)

Collective Corporate KnowledgeIndividual Employee Skills and Knowledge

Know HowOrganizational CultureCustomer Satisfaction


Accounting Standards Codification 805:Categories of Identifiable Intangible Assets

• ASC 805-20-55 presents five categories of identifiable intangible assets:

• Marketing-related intangible assets• Customer-related intangible assets• Artistic intangible assets• Contract-related intangible assets• Technology-related intangible assets

• According to ASC 805, goodwill is also an intangible asset, although it is not an identifiable intangible asset


ASC 805 Marketing-Related Intangible Assets• Examples of marketing-related intangible assets:

• Newspaper mastheads• Trademarks, service marks, trade names, collective marks,

certification marks• Trade dress• Internet domain name• Noncompetition agreements


ASC 805 Customer-Related Intangible Assets• Examples of customer-related intangible assets:

• Customer lists• Customer contracts and related customer relationships• Non-contractual customer relationships• Order or production backlogs


ASC 805 Artistic-Related Intangible Assets• Examples of artistic-related intangible assets:

• Plays, operas, ballets• Books, magazines, newspaper, and other literary works• Musical works such as compositions, song lyrics, and

advertising jingles• Photographs, drawings, and clip art• Audiovisual material including motion pictures, music videos,

television programs


ASC 805 Contract-Related Intangible Assets• Examples of contract-based intangible assets:

• License, royalty, standstill agreements• Advertising contracts• Lease agreements• Construction permits• Construction contracts• Construction management, service, or supply contracts• Broadcast rights• Franchise rights• Operating rights• Use rights• Servicing contracts• Employment contracts


ASC 805 Technology-Related Intangible Assets• Examples of technology-based intangible assets:

• Patented or copyrighted software• Design patents• Mask works• Unpatented technology and know-how• Databases• Trade secrets


How Do Intangibles Create Value?Branding is a marketing strategy to build intangible assets that create a differentiated name and image in the market that will attract and retain customers. A brand and other intangible assets in general provide value through:•Market Advantage/Power

• Premium pricing• Reduced costs• Increased market share

•Defensive Value / Freedom to Operate• Defensive assets protect market share or pricing advantages• Certain legally protected intangibles (i.e., intellectual property) create an

arsenal to discourage lawsuits by others or from utilizing information• Hinder competition from branding efforts or differentiating product


Purpose of the Soft Asset Valuations• Transaction advisory

– Sale/purchase, licensing, M&A, joint ventures, etc.• Strategic decision-making (i.e., IP management)

– R&D planning, make v. buy, maintenance fees, etc.• Tax regulation/planning

– Transfer pricing, creation of IP holding/management companies• Financial reporting

– Purchase price allocation, value impairment• Financing (i.e., use of IP as collateral)• Bankruptcy• Litigation• Regulatory requirements• Others


Generally Accepted Valuation Methods• Cost approach methods

• Reproduction cost new less depreciation method• Replacement cost new less depreciation method• Trended historical cost less depreciation method

• Market approach methods• Comparable uncontrolled transactions method• Comparable profit margin method

• Income approach methods• Relief from royalty method (cost savings)• Differential income (with/without) method• Profit split method• Residual (excess earnings) method


Valuation Parameters• Purpose of the valuation

• Standard of value

• Premise of value

• Valuation date


Standard of Value• The definition of value being utilized for a valuation • Typically selected to match the purpose of the valuation

– Certain purposes require the use of a specific standard of value

• Three primary standards of value– Fair market value/arm’s length standard – U.S. income, gift &

estate tax reporting– Investment value (i.e., strategic value) – decision making– Fair value – U.S. GAAP for financial reporting

The same asset may have vastly different values under different standards of value


Premise of Value• Operational Premise:

• Going concern (value in-use) - Assumes continued future use of the assets as a group.

• Liquidation (value in-exchange) – Assumes sale of assets piece-meal• Orderly (sold over reasonable period of time)• Forced (time-constrained - similar to auction; i.e., “fire sale”)

• Valuation Premise:• Value in-exchange – the value of an asset or business interest

assuming it will be changing hands in a real or hypothetical sale• Value to the holder – the value of an asset or business interest assuming it is

not being sold but instead is being maintained in its present form by its present owners

The same asset may have vastly different values under different premises of value


Valuation Date• All valuations only represent a snapshot in time and are performed

as of a specific date to be clearly identified for the user

The value of the same asset can change from one date to another


Comparing Business Valuation and Intangible Asset Valuation

• Both business and asset valuation consider the same three approaches: income, market and cost. However, the methods within each approach may be different.

• Intangible asset valuation typically entails valuation of a single asset or small group of assets rather than the assemblage of all assets necessary to operate a business.

• Assets involve assessing an incremental benefit stream – specific cash flows attributed to intangible asset vs. total company available cash flow.

• Business valuation typically assumes an indefinite life – i.e. perpetual returns from a going concern, whereas most intangible assets are assumed to have a finite life/diminishing returns.


Comparing Business Valuation and Intangible Asset Valuation (cont.)

• The assessment and quantification of risk can vary significantly• Finite life of assets• Lack of “fungibility” – uniqueness of the asset to a specific business

precludes it from being redeployed in another business.• Intangible assets are less desirable as collateral.

• Market approach is more difficult to apply to intangible assets• By definition, intangible assets are unique• Lack of robust secondary market to observe arms-length trades – i.e. no

stock market.• Business valuation more often entails partial ownership interests

that require a consideration of certain discounts and premia. Partial ownership of intangible assets is rare.


Identifying and Accounting for Risk in Intangible Asset Valuations

• Types of Risk – Business Risk– Technology Risk– Legal Risk

• Methods to mitigate or manage risk– Due Diligence– Pricing

• Methods for Pricing Risk and Uncertainty– Discounted Cash Flows – adjust discount rate for risk premiums– Discounted Cash Flows – adjust cash flow projections

•Weighted range of scenarios (best, likely, worst)•Decision tree – lattice models with discrete probabilistic outcomes•Monte Carlo simulation – continuous probability distributions with a central tendency and std deviation

More About The Faculty: D

RICHARD [email protected]

Richard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in Business Valuation, Accredited Senior Appraiser, Certified Business Appraiser, International Certified Valuation Specialist, Certified Valuation Analyst, Certified in Merger & Acquisition Advisor, Master Analyst in Financial Forensics, Certified in Fraud Deterrence, Accredited in Business Appraisal Review. Richard has been valuing closely held companies since 1985. Richard’s practice is restricted to business valuation, economic damages, profit enhancement and exit planning.

Richard received his Bachelor of Science in Accounting in 1979 from the University of Houston – Clear Lake. He then received certification as a Public Accountant in 1983. Over the years, Richard has earned additional accreditations that relate to business valuations, economic damages and fraud. Richard has been an instructor for the National Association of Certified Valuation Analysts for many years, has been an instructor for the Internal Revenue Service and the International Association of Consultants Valuators and Analysts (IACVA). Richard is currently the Director of Education for the IACVA and is responsible for the business valuations materials being taught in 55 countries. Richard has taught business valuation or economic damage courses in China, Korea, Taiwan.

Richard has performed over 1,000 business valuations since 1985. Richard has testified in Texas County Court, Texas State Court, Bankruptcy Court and Texas State Courts. Richard has given testimony in economic damages (lost profits), shareholder disputes, personal injury, wrongful termination and divorce.



GARY [email protected]

Gary Frantzen leads Alvarez & Marsal's Valuation Services practice in Chicago. He specializes in the valuation of businesses and business interests including equity, liabilities and debt securities, options and other derivative securities / instruments, intellectual property and other tangible and intangible assets.Mr. Frantzen has provided opinions of value, fairness and solvency for a wide variety of purposes including financial reporting, tax planning and reporting, dispute resolution, mergers and acquisitions and other business purposes. He has advised clients regarding the value impact of potential strategic alternatives, business plans and enterprise transactions; valued assets for business combinations, fresh start accounting and impairment measurement; valued business interests for tax planning and reporting, and has provided independent fairness and solvency opinions regarding contemplated transactions.With more than 25 years of experience, Mr. Frantzen has provided valuation advice in a wide variety of situations and industries to management, board members and special committees, attorneys, individuals and the courts. Notable assignments include: the valuation of tangible and intangible assets of a multi-billion dollar, multinational corporation for fresh start accounting; the valuation of the assets of a regional health system with respect to its acquisition by a major university medical center; the valuation of large water and transportation infrastructure projects for financing-related purposes and financial reporting; the valuation of the tangible and intangible assets of a large, multinational chemical producer acquired by a large private equity sponsor; and the valuation of the shares of a publicly-traded hospital management company related to a dissenting shareholder dispute when their shares were acquired in a private transaction.




[email protected] HOBBS

Michael Hobbs is the President of PahRoo Appraisal & Consultancy, a multi-disciplinary real estate appraisal and consulting firm headquartered in Chicago. He holds the SRA designation from the Appraisal Institute, the LEED Green Associate designation from United States Green Building Council (USGBC), RAA designation from the National Association of Realtors. He has qualified as an expert witness before the Federal Bankruptcy Court, United States District Court for the Northern District of Illinois, and State of Illinois Property Tax Appeal Board. For more than two decades, Michael has been employing his energetic style to the industries of Real Estate, Energy Efficiency and Entrepreneurship/Private Equity. Mr. Hobbs has personally completed or reviewed more than 3,000 appraisals, consulting and litigation assignments in matters involving apartment and condominium projects, residential properties, industrial facilities, high-performance and sustainable properties, convenience stores, retail centers, office properties, car washes, special use properties, land development and adaptive reuse projects. He has advised clients on real estate matters in the areas of tax planning and IRS qualifying donations, bankruptcy, tax-deferred exchanges, mergers and acquisitions, liquidation, property tax assessment appeal, relocation, divorce and estate disputes. Mr. Hobbs earned his Bachelor of Business Administration from the University of Notre Dame. He is an instructor, author, and national speaker. He is a board member of The Entrepreneur Organization (EO) Chicago Chapter and REIA Chicago; he is a member of TMA, CCIM, RAC, and CREC.

More About The Faculty:KEVIN LANE

D

[email protected]

Kevin is an accomplished financial professional with over 15 years of experience in private equity and consulting leadership positions. He has led and performed dozens of valuation assignments, including the valuation of small and medium size businesses, intellectual properties, joint ventures, and emerging technologies for a variety of purposes including litigation, technology commercialization, mergers and acquisitions, and tax planning. He currently leads Crowe Horwath’s outsourced corporate development practice.

Kevin has provided expert accounting and valuation testimony, prepared expert reports and analyses, and scrutinized the work of opposing experts related to economic damages in complex commercial litigation matters - testimony venues have included Federal District Court, American Arbitration Association, and formal mediation

Having spent almost three years in the private equity industry, Kevin is also experienced in all aspects of the investment process, including financial modeling, evaluating investment opportunities, performing due diligence, negotiating transactions, and obtaining financing. Kevin has been a guest lecturer at The John Marshall Law School and Loyola University Chicago School of Law on topics including accounting for business combinations, intellectual property valuation and taxation, and economic damages.

Kevin is a Certified Public Accountant (CPA) Accredited in Business Valuation (ABV). He holds a Bachelor of Business Administration, Accountancy and Computer Applications from the University of Notre Dame and a Masters in Business Administration, concentrations in Finance and Economics, from the University of Chicago Booth School of Business. © 2016 DailyDAC, LLC d/b/a/ Financial Poise™ 30

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Important Notes

• THE MATERIAL IN THIS PRESENTATION IS FOR GENERAL EDUCATIONAL PURPOSES ONLY.

• IT SHOULD NOT BE CONSIDERED LEGAL, INVESTMENT, FINANCIAL, OR ANY OTHER TYPE OF ADVICE ON WHICH YOU SHOULD RELY.

• YOU SHOULD CONSULT WITH AN APPROPRIATE PROFESSIONAL ADVISOR TO DETERMINE WHAT MAY BE BEST FOR YOUR INDIVIDUAL NEEDS.

Valuing Your Brand and Other “Soft” Assets

Education

Transcript of Valuing Your Brand and Other “Soft” Assets