The Appraisal Practices Board (APB) of The Appraisal Foundation has adopted APB VFR Valuation Advisory No. 2: The Valuation of Customer-Related Assets. The 116-page document offers voluntary guidance on recognized valuation methods and techniques and “is not intended to be an authoritative valuation standard.” Customer-related assets can include customer lists, order or production backlog, and contractual (and noncontractual) customer relationships.
Nontraditional model: The valuation advisory includes a nontraditional approach, the distributor method, for valuing customer relationships. Traditional valuation approaches tend to treat customer relationships as a company’s primary asset and thus may overstate their value, particularly when an IP asset (such as a brand or technology) is the key business driver. In these instances, using market observations of both wholesalers and distributors as inputs in a multiperiod excess earnings method may be an appropriate approach to valuing certain types of customer relationships.
In BVR’s online archive, there are two articles on the distributor method. One is “Using the Distributor Method to Value Customer Relationships,” by Edward Hamilton and PJ Patel (both with Valuation Research Corp.). The other article raises concerns over this method. Dan Guderjohn and Robert Reis (both with Corporate Advisory Associates) wrote that article, “Valuing Customer Relationships: Does the Distributor Method Miss the Mark?” These are available to subscribers of Business Valuation Update, but they can also be acquired separately.
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