Business names, other intangibles have value

by Joe Johnson

for the Business Journal

It seems that businesses are springing up all over town. Some are old, familiar names, and some are new. (I particularly like the Big Fat Burrito off South National.) But, what's in a name? More importantly, what's the value of a name? How can your business determine what its intangible property is worth things like business names, customer lists, patents, etc.? Why is it important to you?

By assigning value to intangible property, you add value to your business as a whole. And why miss out on assets you've already invested in? It is not too difficult to determine the value of tangible items. When you assign value to tangible items, such as antiques, cars and real estate, you use comparables.

The value of an item is estimated by determining what like or similar items, in similar condition, have sold for in similar geographic areas under similar circumstances. For example, if you want to know the value of a house, you compare that house to the selling price of similar homes in the neighborhood which have sold recently.

But it is not so easy to assign value to intangible items sometimes referred to as knowledge assets. That's because there's usually nothing similar to compare your asset to. For example, if the Coca-Cola company decided to sell its famous trade secret formula, and you wanted to buy it, how would you know what to offer?

Chances are a valuable trade secret formula like Coke's hasn't sold recently in our area.

To assign value to intangible items you must first determine if the intangible property actually has value. This can be resolved by answering two questions.

1. Does the asset change the quality of the services or products with which it is associated?

2. Is it likely that the asset would have value to any third party, e.g., would someone else buy it given the opportunity? If the answer to both of these questions is yes, the asset has identifiable value.

The second step is determining that value. There are more than a dozen methods used to value knowledge assets. Unfortunately, one of the most common is known as the guesstimate. This is the same method often utilized by fishermen, generally between the lake and home, to scientifically calculate the length or weight of their fish.

When appraising an intangible item, for any reason, a more reliable method is desirable.

Another approach is to determine the time and money spent acquiring and developing the asset. In the case of a trademarked name, this may simply be the attorney fees and costs incurred registering the mark, and the cost of developing the mark through advertisements and promotions.

Usually this results in the asset being undervalued. Fast food restaurants probably assign a value to their trademarks much higher than the actual cost of obtaining and promoting their marks.

A better approach is to evaluate future income which may be attributed to the asset, and reduce that income to present value. This requires estimating future revenues which may be realized over the remaining economic life of the asset and factoring out the expenses incurred in realizing the income.

It is important to consider revenue which is readily identifiable as being realized as a result of owning and using the asset. For example, a patent on a machine generally has a 20-year life. Owners can reasonably calculate how much money they will realize on sales of the machine during that period of time.

Basically, while other factors may be important, the anticipated net revenue reduced to today's dollar value gives a good idea of what that patent is worth.

Other methods of valuing knowledge assets include: analyzing reproduction or replacement cost, auction or liquidation value, and the market approach. The market approach is commonly used because it is the easiest. Under this method, value is determined at the time of sale or transfer of the asset.

If you offer $1,000 for the Coca-Cola formula, and your offer is accepted, then the formula is worth $1,000. Obviously, without either the seller or the buyer analyzing the value of the asset, it may be sold for far more or far less than it is actually worth.

So, should you assign value to your knowledge assets? Consider this: If you don't assign value to knowledge assets, you may lose money and not even know it. There are more than 50 identifiable intangible assets which may be used to add value to a business assets that can boost the value of your business, particularly when you decide to sell it or obtain financing.

Further, intangible assets, when valued, may be depreciable. And, on the other hand, it is helpful to know that an asset may have little value. It would not be a good investment to spend thousands of dollars promoting a trade name if that trade name does not add value to your company.

To start, take a look through your balance sheets and tax returns. Do you list intangible property as an asset? When it does appear, have you assigned appropriate values to knowledge assets?

Determining intangible asset value is not easy. Keep in mind that poor valuation of an asset can cause more problems than not valuing the asset at all. Loans granted on overvalued assets, or the sale of an undervalued asset, can significantly damage a business. That's why it is important to consult with attorneys, accountants and appraisers prior to assigning value to knowledge assets.

What is in a name? Value to your business.

(Joe Johnson is a patent attorney with the law firm of Lathrop & Gage LC and is a certified personal property appraiser. He works in the intellectual property department of the firm.)

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