How to Value Intangible Assets

Key takeaways:

• You can apply Relief from Royalty, MPEEM, and cost approaches to value key intangible assets.
• Business Valuation requires assessing economic life, legal protections, market conditions, competitive advantage, and risk.
• Use the market approach when reliable comparable transactions exist for trademarks, patents, or customer lists.
• For internally developed software or databases, consider the cost approach to estimate reasonable replacement value.
• Accurate intangible asset valuation informs M&A pricing, royalty negotiations, tax compliance, impairment testing, and litigation.

Intangible assets often hold the greatest value in your business, even though they don’t appear on a balance sheet in the same way as physical assets. Whether it’s your brand, intellectual property, customer relationships, or proprietary technology, these assets can drive revenue, reduce costs, and give you a competitive advantage.

But how do you determine what they’re worth? Understanding intangible asset valuation can be crucial—whether you’re preparing for a sale, securing financing, or ensuring compliance with financial reporting standards.

Here’s what you need to know about what intangible assets are, how they’re valued, and the factors that impact their worth.

What Are Intangible Assets?

Unlike physical assets such as equipment or real estate, intangible assets are nonphysical resources that contribute to your business’s success. These can include:

• Intellectual Property: Patents, trademarks, copyrights, and trade secrets.
• Brand Recognition and Goodwill: The reputation and trust your company has built over time.
• Customer Relationships and Databases: Existing contracts, customer loyalty, and behavioral data.
• Proprietary Technology and Software: Internally developed software, algorithms, and platforms.
• Noncompete Agreements: Legal agreements restricting competition from former employees or sellers.
• Licensing Agreements and Contracts: Royalties, franchise agreements, and long-term partnerships.

These assets can enhance revenue, improve efficiency, and strengthen your market position—but they can also be tricky to value. That’s where structured valuation methods come in.

How to Value Your Intangible Assets

Intangible asset valuation uses three principal approaches—income, market, and cost—each driven by different data inputs and suitability criteria. Method selection depends on asset characteristics, available market data, and the valuation purpose such as M&A, tax, or financial reporting.

1. Income Approach: Projecting Future Cash Flow

The income approach values an intangible asset based on the future income or cash flow it is expected to generate. This approach is especially useful for businesses where intangible assets play a key role in revenue generation. Our fair value measurement resource outlines techniques to project and discount future asset-related cash flows.

Common methods include:

• Relief from Royalty Method: Estimates value based on the hypothetical royalty payments you would have to make if you didn’t own the asset. This method is often used for trademarks, proprietary technology, patents, and licensing agreements. Explore the valuation process to understand how guideline transactions and royalty assumptions are applied in practice.
• Multi-Period Excess Earnings Method (MPEEM): Focuses on the cash flows associated with a single intangible asset, subtracting charges for other business assets that support its earnings. Depending on the importance of the asset, this method is commonly used for customer relationships, software, and brand valuation in merger and acquisition deals. For valuation guidance specific to business combinations, refer to our resource on valuations in accordance with ASC 805.
  
  Want to learn more about how the MPEEM works and when to use it? Read our in-depth guide on the MPEEM here.
• With and Without Method: Compares financial projections with and without a specific intangible asset to determine its impact on your business. Often used for noncompete agreements, this method measures how much an asset contributes to overall earnings.
• Greenfield Method: Models a hypothetical scenario where your business starts from scratch, relying only on the intangible asset being valued. This method is useful for assets that drive early-stage growth or innovation.
  
  

2. Market Approach: Comparing to Similar Transactions

The market approach estimates value by analyzing comparable sales of similar intangible assets. It’s widely used when there is an active market for the asset type being valued, such as trademarks, patents, or customer lists.

The guideline transaction method is a common application of this approach, leveraging real-world transaction data to benchmark value.

3. Cost Approach: Calculating Replacement Value

The cost approach determines value based on what it would cost to recreate or replace the intangible asset. It assumes that an asset is worth at least the cost required to develop it.

This method is often used when there’s limited market data or when you’re valuing internally developed software, proprietary databases, or business processes. The replacement cost method is the most common application.

Consult our discussion of valuation costs for factors that influence replacement and development cost estimates.

Key Factors That Impact Intangible Asset Valuation

Valuation depends on factors such as economic life, legal protections, market conditions, competitive advantage, and risk profile, each of which materially influences expected future benefits. These factors are assessed together to form a defensible view of value and useful life.

• Economic Life: How long will the asset generate value before becoming obsolete?
• Legal Protections: Patents, trademarks, and copyrights can increase value by preventing competition.
• Market Conditions: Industry trends, competition, and economic factors can raise or lower an asset’s worth.
• Competitive Advantage: The stronger your asset’s differentiation, the greater its value.
• Risk Factors: Uncertainty around future income, potential legal disputes, or changes in market demand can affect value.

You’ll need to analyze these factors carefully when selecting the best valuation method for your specific asset.

Why Valuing Your Intangible Assets Matters

Accurate intangible asset valuation underpins fair deal pricing, royalty-setting, tax compliance, litigation damages, and financial reporting for recognition and impairment. Different use cases require tailored valuation approaches and documented assumptions.

• Mergers and Acquisitions: Ensuring a fair purchase price and properly allocating goodwill.
• Intellectual Property Licensing: Determining fair royalty rates for trademarks and patents.
• Tax Planning and Compliance: Managing transfer pricing, estate planning, and tax reporting.
• Litigation and Disputes: Quantifying damages in contract disputes, trademark infringement, and other legal cases.
• Financial Reporting: Meeting generally accepted accounting principles (GAAP) and the International Financial Reporting Standards for intangible asset recognition and impairment testing.
  
  

Next Steps: Get Expert Guidance on Intangible Asset Valuation

Valuing intangible assets is complex—it requires detailed financial modeling, industry expertise, and strategic insight. Whether you’re preparing for an M&A transaction, navigating tax compliance, or assessing the value of your intellectual property, working with a professional valuation expert can ensure you get it right.

At PCE, we help business owners like you accurately assess the value of your intangible assets.

Frequently Asked Questions

Q: What are intangible assets?
A: Intangible assets are nonphysical resources that contribute to a company's ability to generate revenue or sustain a competitive advantage. Common examples include patents, trademarks, brand recognition, customer relationships, proprietary software, and licensing agreements.

Q: What are the main approaches to valuing intangible assets?
A: The three primary approaches are the income approach, market approach, and cost approach. The income approach values expected future cash flows tied to the asset; the market approach benchmarks comparable transactions for similar assets; the cost approach estimates the replacement or reproduction cost required to recreate the asset.

Q: When is the Relief from Royalty method typically used?
A: Relief from Royalty is typically used for trademarks, patents, and other intellectual property that would otherwise be licensed. It estimates the hypothetical royalty payments avoided by owning the asset, making it well suited for licensing negotiations, trademark valuation, and situations where royalty comparables are available.

Q: What factors should be considered when valuing an intangible asset?
A: Key factors include the asset's economic life, legal protections (such as patents and trademarks), prevailing market conditions, the asset's contribution to competitive advantage, and risk factors that could affect future income. These elements are evaluated together because strength in one area can offset weakness in another, and the combined assessment determines appropriate assumptions and useful life.

Q: Why is valuing intangible assets important for M&A, tax, and reporting?
A: Accurate intangible asset valuation ensures fair deal pricing and proper allocation of purchase price in M&A, supports defensible tax positions and transfer pricing, and meets financial reporting requirements for recognition and impairment testing. It also quantifies damages in disputes and defines fair royalty rates for licensing arrangements.

Paul Vogt

Paul Vogt is a Managing Director at PCE and leads the firm’s valuation practice from its Atlanta office. With over 20 years of experience, he specializes in business valuations for financial reporting, tax planning, litigation support, and corporate strategy across a wide range of industries.

Read Paul's Full Bio