Commercial customer relationship value represents 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 3-21-12, P.J. Patelis and Ed Hamilton of Valuation Research Corporation agree with Economou, and they 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 mitigate against overvaluation, Patelis 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, 2012. 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.