Valuation for Financial Reporting : Fair Value Measurements and ...

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Sample Intangible Asset Valuation Report Language and Example 1 159Valuation Methodology: Income Approach—Relief from royalty method We relied on revenue projections utilized in determining the business enterprise valueof the company and as provided by management. Revenue projections were providedfor the ten-year projection period beginning in 2007. We also relied on a revenueprojection for the residual year. We determined the appropriate royalty rate based on a review of publicly availabledata on trademark/trade name licensing transactions and a comparison of the namerecognition between ‘‘XXX’’ and the guideline royalties. We multiplied this pretax royalty rate to the forecast revenue over the ten-year forecastperiod and the residual year revenue projection. We applied a tax rate of 40% to the projected trade name cash flows. Next, we determined the present value of the after-tax cash flow of the trade nameover the ten-year forecast period and added the present value of the residual at theend of the ten-year period. Finally, we added the amortization benefit factor.Major Assumptions A pretax royalty rate of 2% was determined based on discussions with managementand an analysis of The Financial Valuation Group’s proprietary database. Informationfrom this database documented a range of royalty rates for trademarks to be from 1%to 10%. The median royalty rate was 4%. Acquirer has the right to use the name ‘‘XXX’’ in perpetuity; therefore, the trade nameis an indefinite life asset. We utilized a discount rate of 16%. Contributory Asset Charges No contributory or supporting assets are applicable.Conclusion of Fair Value of Asset See Exhibit 4.9 for detailed calculations. Concluded value was $12,660,000VALUATION ANALYSIS—NONCOMPETE AGREEMENTDescription Paragraph 10.1 of Article X of the Acquirer/Target purchase agreement identifies thethree-year noncompete agreement, which commences at the purchase transaction date.Valuation Methodology Income Approach—Difference in cash flows ‘‘with’’ and ‘‘without’’ competition We held discussions with management to determine what impact the seller wouldhave on the financial prospects of the Company if the seller were able to compete. We started with the projections as provided by management that we utilized inverifying the cost of capital and in determining the cash flows of other identifiableintangible assets. We determined the indicated company cash flow based on management’s projectionsassuming that the noncompete agreement was in place.(continued )
160 Valuation for Financial Reporting We determined the indicated cash flow of the company, making changes to the initialprojections based on management’s indications as to how the projections would differif the noncompete agreement did not exist and the seller were able to compete. We determined the difference in the cash flows with and without the noncompeteagreement in place. We calculated the annual implied differential and discounted those cash flows topresent value at the estimated rate of return of the noncompete agreement. Next, we determined the probability that the seller would compete, based on conversationswith management and economic and industry factors. The present value of the noncompete agreement was reduced by the probability thatthe seller would not compete. Finally, we added the amortization benefit factor.Major AssumptionsWe relied on a cash flow forecast as provided by management Forecast We utilized initial projections provided by management as described in the analysisof the transaction section of the determination of the WACC. Management has projected that if the seller were free to compete, he would be ableto take a total of approximately 10% of revenue in 2007, 20% in 2008, and 10% thenext year. Management believes that after the third year, the seller would not takeany of the company’s projected revenues. Expense percentages for COGS and operating expense percentages would not beaffected by competition for the seller. Other We utilized a discount rate of 16%.Conclusion of Fair Value of Asset See Exhibits 4.10a, 4.10b and 4.10c for detailed calculations. Concluded value was $2,720,000.VALUATION ANALYSIS–TECHNOLOGY (CONSTRUCTIONACCOUNTING SOFTWARE)Description Construction accounting software providing state-of-the-art real-time access.Valuation Methodology Income Approach—Multiperiod excess earnings method We used the business enterprise value as a starting point. We relied on pretax earningsattributable to the technology that existed at the valuation date. We applied contributory charges to the technology cash flow to represent the use ofcontributory assets employed to support the technology-based and customer basedassets and help generate revenue (Exhibit 4.11). We discounted the surviving residual cash flow to present value using the discountrate of the asset. Finally, we deducted an income tax charge and added the amortization benefitfactor.(continued )
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VALUATION FORFINANCIALREPORTINGFair
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VALUATION FORFINANCIALREPORTINGFair
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To our familiesnear and faryoung an
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PrefaceThe second edition of this b
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AcknowledgmentsTo Deanna Muraki, th
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xivAbout the Authorsappraiser with
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Valuation for FinancialReportingFai
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Exhibit 3.4 Target Company Business
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Exhibit 3.7 Target Company Valuatio
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Exhibit 3.16 (Continued)Total Fair
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210 IndexBusiness Enterprise Analys
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212 IndexGoodwill (continued )111,
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214 IndexLong-termcapital, 71debt,
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216 IndexSecurities and Exchange Co
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