WHAT WEIGHT DO INTANGIBLE ASSETS HAVE?
By asking and answering the key intangible asset valuation questions well before other valuers start to address the issues, Eric believes that his foresight, level of professionalism, and client service in relation to determining intangible asset value for business valuation is unmatched in the industry.
25 Factors Affecting Business Valuation
|4. Return on Investment (ROI)|
|6. Cost of Liquidation|
|7. Hard Assets|
|8. Utility, Sustainability, and Scalability|
|9. Research & Development (R&D)|
|10. Processes, Procedures, Systems, and Documentation|
|11. Shareholder Agreement|
|12. Management Capability, Workforce, and Intellectual Property|
|13. Client Base|
|14. Supply Chain|
|15. Distribution Network|
|16. Marketing (Advertising, PR, Brand & Crypto Promotion)|
|17. Dominance in the market|
|18. Industry benchmarks (averages)|
|19. Terms of lease|
|20. Terms of Sale|
|21. Minority Interest|
|22. Special Interest Purchaser|
|23. Geopolitical considerations|
The object of the methodology is to determine the factors and sub factors within a business and weigh them as required in point 7 of the Income Tax Act Policy Paper.
Utility, Sustainability, and Scalability
Cumulative Value of Marketing, Brand, and Advertising
Cumulative Value of Research and Development
Cumulative Value of the Workforce - Key Employees, Management, Regular Employees, and Contractors.
Value of the Client Base.
The Position Papers provide real world proof, with examples, that the factors are real, important, and purposefully dovetail with the 41 points in the Income Tax Act Policy Paper.
From: Canada Revenue Agency
SUBJECT: Policy Statement on Business Equity Valuations
Weighting of Various Factors
Depending on the nature of the corporation's business, certain of the relevant factors may be accorded greater weight. In some businesses, earnings may be the primary determinant of value, while in others it may be asset value. The valuator must consider a different combination of factors in each case in determining fair market value.
I discuss with clients, in depth, the relevant 25 Factors to find what weight should be given to each factor as the act requires for reaching the fair market value. As we go through these 25 Factors, other sub factors almost always come up. Examples might be “scarcity” or “timing”. This is where business experience enters into the process. In my experience I have found hundreds of “sub factors”.
25 Factors Affecting Business Valuation system does not consider unverified mass purchased, business sale price data to be reliable enough to be used in compiling “comparable sales information”, which may or may not be “comparable”. Who spoke to the seller?
WHAT BUSINESS EXPERIENCE IS NECESSARY?
Who is Qualified?
The Income Tax Act which is the legislation governing business valuations in Canada Policy Statement is specific in that it does not give special status. “The valuator must use reasonable judgment and objectivity” (which suggests experience).
“Fair market value”
and “giving more weight to certain relevant factors” are recurring
themes one finds in the Canadian Income Tax Act Policy Paper. The Policy Paper in Point 7
demands that “certain of the relevant factors may be accorded greater weight”. In 2022
and going forward we know intangible assets are the largest asset group, in many cases
up to 90% of company value is intangible assets.
Our methodology includes 25 Factors and 5 robust Position Papers with emphasis on weighing intangible assets to reach fair market value. When using the 25 Factors methodology, we follow the Income Tax Act Policy Paper.
We think our way through the business valuation, following the 41 point Canada Revenue Agency Policy Paper.
What you get is a “Hands On” or more properly speaking, a “Mind On” valuation by a business professional who understands how to use the 25 Factors Affecting Business Valuation system supported by the extensive Position Papers that go with them.
One must turn on the mind and let the 25 factors methodology work.
This is where the valuator needs to have significant business experience. Our business valuations are done only by people who have had 10 years or more experience in owning and operating a small business, "learning to do by doing" and gaining the necessary experience and wisdom. This is experience, wisdom, and skill sets that can never be taught in a course or at a school?
This is hard for some to understand but If you are a seasoned business owner, you understand well the skill sets I am referring to.
Intangible assets are strategically important, and generally the largest part of business value that must be fully weighed in a business valuation to be compliant with point #7 in the Income Tax Act Policy Paper.
Without this business experience the valuator is not going to pick up on the nuances, and would likely miss a lot of sub factors in the business during the intake process.
To our knowledge there is no competing business valuation group or association with such a robust methodology or system in place to value intangible assets necessary to produce a fair market value business valuation in Canada or the world that meets or exceeds the 41 points described in the Canada Revenue Agency Policy Statement On Business Equity Valuations.
WHAT DOES RELEVANT BUSINESS EXPERIENCE MEAN?
Example of what relevant business experience means?
A good example is a person who acted as a painting contractor painting houses in the summer while working their way through college; followed by a 3 year partnership with a college friend in an internet based dog walking service that was not going anywhere and was sold for small money. This followed by a 15 year successful flower delivery service that grew rapidly and was sold at a handsome profit.
Bad example of relevant business experience:
The person who took over and ran for 18 years, the family business consisting of owning and renting parking space downtown; would not qualify.
Even if someone had a business degree from Queens, I would need to see a few years of relevant business owner operator experience on their resume before I would try to train them in the 25 Factors Affecting Business Valuation methodology.
THEN THERE ARE TANGIBLE ASSETS TO VALUE.
Who has the experience and training?