May 21

Unlocking Value in the Digital Age

In today’s digital economy, understanding the value of intangible assets is crucial for businesses aiming to accurately reflect their true market worth. Among these assets, data stands out as a pivotal resource, increasingly driving decision-making and innovation across industries. As we look into the complexities of valuing data—an asset often off the books yet integral to operational and strategic success. We will explore the methodologies for assessing the value of data, and how these assessments affect businesses in the tech-driven marketplace.

Understanding Intangible Assets

There are many intangible assets owned by a business. Intangible assets could include those that are:

  • Contract-based;
  • Marketing-related;
  • Customer / supplier related;
  • Technology related; and
  • Artistic related.

This article focuses on the technology related intangible assets or “technological intangible assets”. 

Technological Intangible Assets

Technological intangible assets could include patented technologies, software, databases and formulas, processes and secret receipts.

KFC has a secret recipe, the 11 herbs and spices that make this large company outstanding in its field.  Coco-cola is similar.  Since the value of these businesses is so bound in these secret recipes, these secrets will never be told. 

Many companies have databases that provide enhanced business operations and management decisions.  We will examine the importance of databases in the operations of a business is often based on the use of technological intangible assets.

The Importance of Data in Business

Many businesses have databases.  These databases can be considered technological intangible assets. 

Businesses capture data on sales.  Use of online stores and other point of sales help businesses build their databases for superior product or service marketing. Social media tools assist with decision on targeting advertising efforts.  Other businesses may employ other key performance indicators (KPIs) to provide quality data support for business decisions.

Point of sales devices and online stores can help businesses target their markets more efficiently.  Information from these devices can be used to build the databases that provide information about the sales cycle and process from the buyers’ perspective.

Online social media marketing tools provide data for a database to the business on reach and depth of posts and ads on social media audiences.  This data can be used in a database to assist the social media development by the business to better target the right audiences for the product or service offered.

KPIs can be used to measure historical sales performance across products, services, people, stores or jurisdictions.  Utilizing the data can assist businesses to identify successes and failures in various arenas yielding appropriate decisions on resource usage.

Identification and valuation of the intangible asset database will enable companies to explicitly state this asset on the balance sheet and maximize their value upon a transaction. 

Following is a description of the common methods for valuing intangible assets.

Common Methods for Valuing Intangible Assets

There are three common methodologies for valuing intangible assets, like databases.  Focusing on a technology owned by the business, like its database, the valuer, like Troy Valuations, would use one or all of these approaches to determine its value.  Within each approach is a description of the methodologies employed.

Cost Approach

The cost approach utilizes the businesses own records to determine how much the technology cost to design and bring to market.  Those businesses who have business records that include costs associated with the research and development of a database would benefits on the sale of the database with hard data supporting its cost. For example, the Stanford University AI Index Report[1] estimated that the cost of compute, in 2023 alone, for Open AI’s ChatGPT was in excess of $73 million, while the cost associated with Google’s Gemini was over $191 million.

Market Approach

The market approach uses prices and other relevant information that is generated by market transactions involving similar assets to apply to the subject to determine its value.

  • Royalty rate analysis: A common method of the market approach is the analysis of market royalty rates, and royalty agreements when available, for the use of the technological intangible asset. The market royalty rates are then applied to the cash flows generated by the subject technological intangible asset to determine its value.
  • Profit Split: A second method is the profit split method that uses a rule of thumb (25%-33%) to split the cash flows created in the use of the intangible asset between the licensor and the licensee.

Income Approach

The income approach determines the value of the intangible asset through the income received by its ownership. 

  • MEEM: A multi-period excess earnings method (“MEEM”) considers the excess income from the intangible asset.
  • Relief from Royalty: The relief from royalty method, is based on the avoided third party license payment for the right of use of the intangible asset.
  • With and Without: The with and without method considers differential cash flow with and without ownership of the intangible asset and the greenfield method considers the value if the intangible asset was the one asset in place.

This is a hybrid method between the market approach and the income approach.

The relief from royalty method utilizes the cost (like a royalty) that a business might pay to gain access to the technology owned by the businesses.  This analysis seeks to value the income stream of the technology to determining the cost of acquiring the use the technology through a royalty of a technology.

Following is a case study in which we have used the relief from royalty method to value a database.

Database Case Study

Troy Valuations has used these methodologies successfully in support of a valuation and a purchase price allocation for a company.  The acquiror company that was the subject of a valuation acquired a company that had a database of information that was of interest to the acquiror.

As part of the purchase price allocation, the acquiror company wanted a value of the database along with the tradename of the business acquired, another intangible asset to enable recognition of these assets on the balance sheet.

Unfortunately, the acquired business did not have sufficient data to support the cost methodology associated with the creation of the database or the trademark. 

Troy Valuations employed a relief from royalty method to value the database purchased and the tradename.  This enabled a purchase price allocation from nearly 100% of the value to goodwill to 85% goodwill. Additionally, the business did focus disclosure on the database acquired.

This provided the business an ability to amortize its costs of acquisition of the database and trademark over time reducing its tax costs.

Understanding value of your data can unlock opportunities for growth

As the digital landscape evolves, understanding and leveraging the value of your data becomes crucial. Understanding the value of your data can unlock opportunities for growth, strategic investment, and competitive advantage. With Troy Valuations, you gain a partner equipped to navigate these complexities, ensuring your data is not just valued accurately but also utilized to its fullest potential.

Contact us today and let us transform your data into strategic assets that drive real business success. With Troy Valuations, you gain a partner equipped to navigate these complexities, ensuring your data is not just valued accurately but also utilized to its fullest potential. Contact us today and let us transform your data into strategic assets that drive real business success.”


[1] AI Index Report 2024 – Artificial Intelligence Index (stanford.edu),  Nestor Maslej, Loredana Fattorini, Raymond Perrault, Vanessa Parli, Anka Reuel, Erik Brynjolfsson, John Etchemendy, Katrina Ligett, Terah Lyons, James Manyika, Juan Carlos Niebles, Yoav Shoham, Russell Wald, and Jack Clark, “The AI Index 2024 Annual Report,” AI Index Steering Committee, Institute for Human-Centered AI, Stanford University, Stanford, CA, April 2024


Tags

Business Assets, business value, Fair Market Value, Intangible assets


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