Calculated Intangible Value (CIV) is a strategic approach to appraising a company’s intangible assets—those non-physical elements that significantly contribute to its value. Unlike physical assets, such as machinery or real estate, intangible assets do not have a direct, observable market value. These include patents, trademarks, copyrights, brand equity, customer relationships, and proprietary technologies.
What Makes Intangible Assets Important?
Intangible assets can be the driving force behind a company's competitive advantage. They often play a crucial role in a company's market success, yet they are challenging to quantify because they do not have a physical form and are not easily converted into cash. As such, accurate valuation is essential, especially when assessing the overall worth of a business during events like sales or mergers.
Key Aspects of Calculated Intangible Value (CIV)
1. Definition and Purpose: Calculated Intangible Value (CIV) is a valuation method designed to estimate the worth of a company's intangible assets. This approach provides a more stable and detailed valuation than methods that rely solely on fluctuating market values.
2. Factors Considered in CIV:
- Pretax Earnings: This reflects the company's profitability before tax considerations.
- Return on Tangible Assets (ROA): Both the company’s and the industry’s ROA are analyzed to understand the performance of physical assets.
- Industry Benchmarks: Industry average ROA helps in comparing and contextualizing the company’s performance.
The CIV Calculation Process
1. Average Pretax Earnings: Calculate the average pretax earnings over the past three years to gauge the company's profitability.
2. Average Tangible Assets: Determine the average value of tangible assets at year-end for the same three-year period.
3. Return on Assets (ROA): Compute the company’s ROA by dividing average pretax earnings by average tangible assets.
4. Industry Average ROA: Find the industry average ROA over the same three years to serve as a benchmark.
5. Excess ROA Calculation: Calculate the excess ROA by taking the difference between the company's ROA and the industry average ROA. Multiply this excess by the average tangible assets.
6. After-Tax Excess Return: Determine the average corporate tax rate over three years, apply it to the excess return, and adjust the excess return accordingly.
7. Net Present Value (NPV): Finally, compute the NPV of the after-tax excess return using the company's cost of capital as the discount rate. This step provides the present value of future returns attributable to intangible assets.
Why CIV Matters
Understanding CIV is crucial for business owners, investors, and appraisers because it offers a comprehensive valuation of intangible assets that might not be immediately evident through traditional valuation methods. By incorporating various financial metrics and industry benchmarks, CIV provides a nuanced view of a company’s value beyond its physical assets.
This method can be particularly valuable in scenarios such as mergers and acquisitions, where a precise understanding of all asset types, including intangible ones, is vital for making informed decisions.
Summary
Calculated Intangible Value (CIV) provides a detailed approach to valuing intangible assets, accounting for factors such as pretax earnings and industry benchmarks. By following a structured calculation process, it helps in accurately assessing the value of non-physical assets that are crucial to a company’s success.
