Valuing customer relationships

Commercial customer relationships represent the largest intangible asset (aside from goodwill) identified in the purchase price allocations analyzed for BVR’s new study, Benchmarking Identifiable Intangibles and Their Useful Lives in Business Combinations.

Steve Economou, at the ASA Advanced Business Valuation Conference in Phoenix, commented that high allocations to customer relationships “can be a risk, and perhaps appraisers tend to overvalue this segment.”

The issue is of great import to private equity as well. Writing in Private Equity Manager, March 21, 2012, P.J. Patel and Ed Hamilton of Valuation Research Corp. agree with Economou and explain why that may be:

In valuing customer relationships, valuation professionals have historically relied on the application of traditional valuation methods and at times have failed to consider whether the value conclusion was consistent with a market participant’s view. In many industries, customer relationships are not the most important asset, but traditional valuation methods tend to reflect customer relationships as a primary asset. A point that is often overlooked is that customers often purchase products or services because of the presence of intellectual property—the brand, or the technology—not the presence of a relationship.

To protect against overvaluation, Patel and Hamilton advocate employing a distributor method (DM), wherein distributor inputs are accepted as a reasonable proxy when valuing the relationships of the target company.

In a highly anticipated, thorough review of data gathering and analysis and applying the appropriate valuation techniques, Poonam Vaidya, ASA, CBA, of Crowe Horwath LLC and Thomas Zambito, MBA, of BDO Consulting, will host a BVR webinar on valuing customer relationships on November 29. Valuators will come away with a good understanding of how to value customer relationships, including which valuation methods are best for what circumstances and what data inputs are necessary for each.

Interbrand releases its 2012 survey of the most valuable global brands

Interbrand annually publishes its Best Global Brands report of the world’s 100 most valuable brands, using an ISO-certified methodology that examines three key aspects of brand value:

• The financial performance of the branded products or service;
• The role the brand plays in influencing consumer choice; and
• The strength the brand has to command a premium price or secure earnings for the company.

Here is Interbrand’s “top 10” with their corresponding values:

1. Coca-Cola, $77.8 billion;
2. Apple, $76.6 billion;
3. IBM, $75.5 billion;
   
4. Google, $69.7 billion;
   
5. Microsoft, $57.9 billion;
   
6. GE, $43.7 billion;
   
7. McDonald’s, $40.1 billion;
   
8. Intel, $39.4 billion;
   
9. Samsung, $32.9 billion; and
10. Toyota, $30.3 billion.

Analysts should understand the limitations of market data in their search for reasonable royalty rates

Steve Economou, managing director of Curtis Financial, discussed how to support royalty rate valuations at the ASA Advanced Business Valuation Conference in Phoenix. Suggesting that practitioners, auditors, and the courts have a decided preference for market data, he listed the limitations analysts need to be aware of when searching for royalty rate comps:

1. A search for comps can yield a wide range of data, which may not add to the analysis;
2. Agreement terms have to line up with the situation being valued;
3. Often researchers know little about the licensee or licensor;
4. What appears to be a comp may include intercompany transactions;
5. Often it is difficult to match up time periods or market conditions; and
6. Early or extra payments can affect the terms.

All of these reasons make it critical for valuation analysts to search the full text of license agreements to ensure comparability, which explains the overwhelming popularity of ktMINE, the license and royalty rate database that not only provides unsurpassed search tools and a database of over 13,000 agreements with nonredacted, variable royalty rate information, but also serves up the relevant document in full text with one just click.

USPTO and EPO provide an early release of their collaboration to harmonize classification schemes

Since the Oct. 25, 2010, agreement to harmonize their separate patent classification schemes, the USPTO (using the USPC classification system) and the European Patent Office (EPO), using the ECLA classification system, have worked jointly to develop the Cooperative Patent Classification system, or CPC. The CPC, which includes approximately 250,000 classification symbols based on the International Patent Classification (IPC) system, will enable users to conduct efficient prior art searches and incorporate the best classification practices of both the U.S. and European systems. It will also enhance efficiency through work-sharing initiatives designed to reduce unnecessary duplication of work.

Ahead of schedule, the results of their collaboration are now being made available through a launch package that includes the complete CPC system, any finalized CPC definitions, and a CPC-to-IPC concordance.

The products provided in this package include:

1. The complete CPC scheme;
2. 59 final CPC definitions (out of 625); and
3. An ECLA-to-CPC-to-IPC concordance table.
   

The remaining CPC definitions will be released in batches at the beginning of each month as soon as they are finalized. It is anticipated all batches will be completed by early 2013.