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Business valuation

4.2 Intangible assets

A business is usually worth much more than just the sum of its constituent net
assets. In fact the value of the tangible assets in many businesses is minimal since
much of the value comes from intangible assets and goodwill.

Intangible assets are those assets that cannot be touched, weighed or
physically measured, for example patents, goodwill, relationships,
networks and skills built up by the business over time.

4.3 The calculated intangible value (CIV) method

1 Find the return on assets (operating profit / total tangible assets) of a

suitable competitor (similar in size, structure etc).

2 If no suitable, similar competitor can be identified, use the industry
average return on assets (ROA).

3 Calculate the company’s ‘value spread’ i.e.
Company operating profit – (ROA from above
× Company tangible assets)

4 Assuming that this value spread would be earned in perpetuity, the
CIV is found as follows:

– Calculate the post-tax value spread

– Apply a perpetuity factor (1 / WACC) to find the present value of
the post-tax value spread (this is the CIV).

5 The CIV is added to the tangible net asset value to give the overall
value.

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