Determining the remaining useful lives of intangibles is a significant part of a valuation analysis

In an article in the September/October issue of Valuation Strategies, Robert Reilly of Willamette Management Associates in Chicago gave several reasons why analysts should not reflexively reject the cost approach to valuing intangibles.  Regardless of approach used, Reilly outlines the significance and importance of the “lifing analysis” … determining the remaining useful lives (RULs) of the intangibles valued. For example:

  1. Using the market approach, the lifing analysis may be used to adjust comparable license transaction data;
  2. The lifing analysis using the income approach may be used to estimate the income projection period; and
  3. The lifing analysis using the cost approach may be used to estimate the total amount of obsolescence.
Normally, states Reilly, with the income and cost approaches, a longer RUL estimate results in a greater value (more related revenues and generally less obsolescence, respectively).  With the market approach, comparables should not have a materially different RUL, or adjustments would be necessary.

Analysts and auditors looking for benchmarking data on what analysts are using for RULs for intangibles valued in purchase price allocations should refer to BVR’s new Benchmarking Identifiable Intangibles and their Useful Lives in Business Combinations, still available at a charter rate.