Using the Distributor Method to Value Customer Relationships

Business Valuation Update
Business Valuation Australia
July 16, 2014
Edward Hamilton, CFA
PJ Patel, ASA, CFA


A common framework when valuing intangible assets of a business—such as brands, trademarks, and technology—is to use the relief from royalty method, combined with the multiperiod excess earnings method (MPEEM), to appraise customer relationships. This framework requires significant market evidence, especially at the asset level, because of the challenge of finding royalty indications that are directly comparable to the asset being valued. Therefore, in certain industries and situations, this framework may be highly subjective and, if applied in a mechanical manner, may provide a value conclusion that is inconsistent with a qualitative assessment of the entity and its underlying assets. As an alternative, in certain situations, we replace the company-specific margin with a market-based margin, as a reasonable market proxy, in an MPEEM. This method is commonly referred to as the distributor method (DM). The name is derived from the initial use of distribution companies as the market proxy. Subsequently, extensions have been developed for other situations.