Established companies do not thrive on tangible assets alone. To say that intangible assets play a large role in determining the overall value of a company is a gross understatement. In fact, patents, copyrights, and other intangible assets can have substantial impact on the value of a business. In today’s marketplace, it is not uncommon for real estate holdings and equipment to account for a very small piece of the overall pie.
This is a byproduct of our knowledge-based economy. To thrive in today’s post-manufacturing world, where industries have been transformed and balance sheets turned upside down, smart businesses are routinely evaluating the assets listed on their balance sheet, and unlocking the true value of their businesses by assessing intangibles. Even smarter businesses are taking that concept one step farther and ensuring that they have systems in place to continually uncover hidden innovation and intellectual property as they move forward.
Unfortunately, intangible asset valuation is a tricky area that is difficult to handle in-house. Accounting systems are not designed to provide feedback on intangibles, and given that these valuations involve greater subjectivity, a professional with a consistent and respected methodology is usually necessary. However, an understanding of your company’s intangible assets—whether they be trademarks, employees, brand loyalty, proprietary technology, copyrights, customer relationships, contracts, R&D, corporate culture, trade secrets, or something else—drives your business valuation.
That number is something that all companies should know, whether they are raising money, selling the business, attracting financing, protecting intellectual property from competitors, or simply trying to grow faster. After all, how can a company become the next industry leader without an intimate knowledge of its assets? Google doesn’t have an $800 billion market capitalization because it owns a lot of servers and furniture. Google is a powerhouse because it understands how to leverage intangible assets.
Intangible assets are what gives a company its edge and boosts its earnings. Taking steps early on to capture and increase the value of patents and intangible assets allows business owners to grow their company ahead of an exit or another corporate milestone. Profitability now hinges on a company’s ability to create, transfer, assemble, integrate, protect, and exploit knowledge assets.
Your company likely has numerous entities that contribute to your success. They may be a streamlined business process, a talented senior management team, or a stellar customer retention program. Make sure you understand where your company’s value truly lies.
Innovative and creative undertakings are the forces that drive the U.S. economy. Over the last century, we have experienced unparalleled advancements that defend our competitive edge and improve our quality of life. As a leader in innovation, our nation’s companies rely on intellectual property as one means for promoting sustainable growth.
Copyrights, trademarks, and patents allow companies to establish an authentic identity through ownership of their brand, inventions, and ideas. This legal framework benefits businesses, their employees—and, as a result, the economy.
In 2016, the U.S. Department of Commerce published Intellectual Property of the U.S. Economy: 2016 Update, a report that validates the powerful link between IP and economic evolution. Although every industry utilizes intellectual property rights, the U.S. Department of Commerce has identified 81 industries that use copyrights, trademarks, and patents more extensively than others. These “IP-intensive industries” are the ones that have the most profound impact on the nation’s economy. They directly and indirectly support up to 45 million jobs, which accounts for 30 percent of the total jobs in our country. These industries also contribute over $6 trillion to the United States’ gross domestic product (GDP), or 38.2 percent of its total amount.
The creation of high-paying jobs
The creation of jobs is integral to powering a better economy. IP-intensive industries—tech, entertainment, pharma, and media—continue to support an increasing number of jobs, and are also responsible for creating rich, culturally diverse companies. A percentage of these jobs are made up of self-employed individuals, who account for 8.5 percent of the jobs created in these industries.
While the creation of jobs is important, it is also important to note that these positions pay well—roughly 46 percent higher than in other industries. This means that, on average, an employee from an IP-intensive industry would make hundreds of dollars more per week than an employee working in a non-IP industry. There are 18 states across the country—where employee salaries in these industries are almost 20 percent above the national average.
Economic growth and competition
Intellectual property incentivizes owners to think creatively and develop unique innovations, knowing they are protected from copyright infringement. This fosters a more advanced economy, with many ideas and products proactively working to enhance quality of life for U.S. residents. IP also influences more investment opportunities and supports both entrepreneurial liquidity and licensed tech through various business valuations. These factors all affect how intellectual property is valued and how IP benefits the economy.
IP-intensive industries account for over 38 percent of our GDP, but they also account for 52 percent of merchandise exports from the United States—an unprecedented gain of $842 billion. Manufacturing, oil and gas, and pharmaceutical industries are just a few of the sectors that benefit the most from exports to other countries.
Although the economic advantages of IP are clear, there is still a lot that can be learned about how intellectual property can continue to energize the U.S. economy.
The production of our nation’s electricity has seen a significant shift from non-renewable to renewable energy sources in the last two years—solar, wind, hydropower, geothermal. In 2016, 15 percent of our electricity was derived from these environmentally friendly alternatives, which climbed to nearly 20 percent last year.
As our nation leans more heavily on renewable energy, we become less dependent on fossil fuels; minimizing our usage of fossil fuels begets environmental and financial benefits. Renewable energy reduces carbon emissions, protecting the environment—and us. As these energy costs continue to fall, renewable energy is also becoming a more cost-effective alternative. According to the director-general of the International Renewable Energy Agency (IRENA), these declining costs are indicative of an industry that is truly disrupting the global energy system.
Needless to say, renewable energy is poised for more unprecedented growth in 2018 (and for many years to come), with wind energy a major contributor to that expansion. Last year, wind energy generated 6 percent of the nation’s electricity and accounted for 37 percent of electricity produced by renewable energy. In the first quarter of 2017, the American Wind Energy Association (AWEA) reported that a new wind turbine was installed in the United States every two and a half hours.
Because of this rapid expansion, the U.S. is reputed for being a world leader in wind energy, next to China and the European Union. As energy developers look to acquire more land for wind farming, property owners stand to make a profit—literally. The wind energy sector compensates farmers, ranchers, and landowners upwards of $222 million every year to lease property for wind turbines—a number that is expected to rise exponentially in the foreseeable future.
If an energy developer finds a suitable location for their wind farm, the property owner will receive a wind turbine lease that confirms the conversion of their land, and proper compensation. The landowner will receive a monthly rental payment, which varies according to the number of wind turbines on the property, their location, and the rate of local competition. On average, a smaller, single wind turbine lease can be valued at around $8,000 per year; a larger turbine, between $50,000 to $80,000.
Power companies also benefit from the federal tax credit on wind production, which was extended by five years at the end of 2015. And 80 percent of those companies’ costs are in the machinery. An equipment appraisal shows that a commercial turbine costs anywhere from $3 million to $4 million installed.
It is important to obtain an equipment appraisal and business valuation of your wind power facility for a variety of reasons, including tax and insurance reporting purposes. Due to the complexity of these power valuations, a firm must have experience and knowledge regarding the renewable energy industry to conduct a precise appraisal.
At Appraisal Economics, we use proven methodologies that provide the most accurate valuation reports.A combination of cost, income, and market approaches are necessary to conduct a wind turbine valuation, which will help establish the worth of your facility and equipment.
When preparing for an acquisition or merger, there are numerous issues that require forethought and careful planning from a company before a transaction can be finalized. Of these issues, golden parachutes should be a top priority.
The “Golden Parachute Rules,” which were first established by Congress in 1984 and later finalized in 2003, can result in repercussions for both companies and disqualified individuals. Companies can lose their tax deduction, while disqualified individuals—shareholders who own more than 1 percent of the company’s stock, officers of the corporation, or highly compensated individuals—risk owing excise taxes.
These golden parachute payments are a form of compensation paid out to disqualified individuals following a change in control. Congress supplemented Section 280G as part of the Internal Revenue Code to dissuade companies from issuing golden parachutes for excessive gain either for themselves or management. Many believe that companies see parachute payments as an incentive to solicit an acquisition or merger for the benefit of management, rather than what’s in the best interest of the shareholders.
Parachute payments can include anything from a bonus to restricted stock to severance payments. These payments become problematic when they exceed a certain threshold, which is calculated by comparing the parachute payment with the base amount of the disqualified individual. If payment is less than three times the base amount—or the average annual compensation of the individual over the past five years—it’s considered a safe harbor amount and not subject to penalty. If payment exceeds the base amount, it becomes an excess parachute payment and violates Section 280G.
Section 280G prohibits deductions for excess parachute payments, and Section 4999 begets a 20 percent excise tax from the individual, which the company cannot consider a deductible. Oftentimes, provisions may be built into contracts that limit the number of parachute payments allowed by companies so excess payments won’t frequently occur.
Parachute payments can be reduced when compelling evidence is presented that proves the amount is reasonable compensation for services provided by a disqualified individual after the change in control takes place. This is advantageous because the amount is decreased prior to the payment/base amount calculation transpires. Excess parachute payments can also be reduced when strong evidence proves the amount is reasonable compensation for services provided by a disqualified individual before the change in control happens. A valuation company will get involved at this stage to analyze whether the amount determined can be considered reasonable compensation.
While rare, there are certain corporations that are exempt from Section 280G. These include: S-corps, partnerships, LLCs, and tax-exempt organizations. “Small business corporations” are also exempt from the parachute payment rules. To qualify, these organizations cannot have more than 100 shareholders or more than one class of stock. These requirements typically apply to s-corps, but making an S election isn’t necessary to be distinguished as a small business corporation in regards to the golden parachute rules.
Yes, business valuations cost money, but savvy business owners don’t view the expense as a financial burden. They understand that it’s actually a smart investment that can more than pay for itself over time. If performed correctly, a business valuation isn’t merely worth the money, it’s a roadmap to increased profitability.
Every company has a need for consistent business valuations. In their most mundane applications, they’re necessary for public companies to comply with accounting standards, and for private companies to deal with gift or estate taxes, stock compensation, and capital structuring.
Whether a business has interested prospects seeking to explore an acquisition or not, every executive should understand their company’s worth at all times. And, let’s face it, only a certified expert can properly value depreciated assets, perform reliable patent valuations, or assess other intangible assets, which often play an enormous role in in determining a company’s overall worth. Knowing your company’s value is useful, and most certainly worth the money, especially when business owners perform periodic valuations and track performance over time. But appraisals become indispensable and priceless when leveraged strategically to boost profitability and improve operations.
A quality business appraisal analyzes a company’s finances, assets, operations, and practices, each aspect of which are not only detailed, but also benchmarked against similar companies that are often of comparable size, industry, and geography. In this context, a valuation can highlight strengths and bring to light weaknesses that are impacting your bottom line.
From a big-picture standpoint, companies can grasp which assets, practices, and disciplines are driving the value of their business. They’ll also have the ability to assess what risks are negatively impacting them, as well as anticipate how evolving market trends could factor into the company’s health down the line. Could anticipated drops in real estate values cause future challenges? Likewise, could changing industry conditions open up new opportunities to expand services or enter new geographies?
Business valuations can be used as strategic planning tools, and can even enable business owners to analyze how certain strategic business decisions would impact the company before the measures are actually pursued, saving time, helping to avoid costly mistakes, and redirecting resources to the best long-term value drivers.
Just as business valuations can help owners frame their best-case, big-picture strategic direction, a valuation can also point to smaller performance indicators that add up to big savings and profitability enhancements. Industry benchmarks can help a business assess areas where it’s outperforming the competition, and areas where it isn’t. These indicators could include metrics related to accounts receivable collections, headcount, process efficiencies, technology adoption, sales, customer data, and more. These metrics remove the mystery from your corporate performance and provide a clear roadmap for how, specifically, to better compete in the marketplace.
So while it’s tempting to view a business valuation as a costly “nice-to-have” that can be indefinitely postponed, it’s actually a tremendous investment to make in your business. The insights and information will literally shape your company’s future trajectory, ensuring your daily operations and strategic initiatives are calibrated for maximum growth and impact.
As we embrace increasing digitization, it’s important to consider how technology is reshaping our world. Increased online activity is great for companies hoping to quickly and cost-effectively gain notoriety and influence; after all, it’s much easier for brands to reach larger national and international audiences via the web and social media platforms. But the additional exposure creates risks, making brands more susceptible to trademark disputes.
Trademarks are used to differentiate a company’s products and services, and can serve to protect a logo, name, phrase, design, or any combination of these elements. They are, essentially, your brand. Your reputation. And while it’s understandably an imperative for any marketing department to promote the brand as widely and loudly as possible, ideas take on a life of their own in the virtual world. Concepts are shared and, much to our dismay, embraced by competitors. This occurs at a dizzyingly fast pace and, without established trademarks, can leave the individual or company who pioneered the concept at a huge disadvantage in the marketplace. There’s nothing worse than coming up with a perfect way to brand an offering, only to have that competitive edge snapped up and exploited by someone else with more marketing resources and budget at their disposal. This can obviously hobble a company’s ability to sell its products, grow, and thrive.
The truth is, however, that even when a company does take the appropriate steps to protect itself with trademarks, it’s often not enough. Intellectual property disputes have become a disturbingly common occurrence, and seem to be an unavoidable byproduct of digitization.This isn’t to say that businesses shouldn’t bother to trademark. Quite the opposite is true. Businesses should trademark, and then seek valuations of their trademarks. This is because trademarks are more important than most people think. They’re the brand and the reputation, yes, but they’re also a company’s industry standing and its ability to effectively sell its services.
Trademarks serve as valuable intangible assets, making them an important component to a company’s worth. Economists largely agree that intangible assets like trademarks, brands, intellectual property, and licenses now account for the lion’s share of a company’s economic value, and they represent key performance drivers in our evolving knowledge-based economy. This means that in order to understand the current value and success of a company, it’s critical to not only have trademarks and patents in place, but to perform a valuation of the assets. This helps a company assess its competitive advantage, and also helps to protect it, because understanding the value of a trademark makes it possible to quantify the stakes in any legal disputes that may arise.
Trademark valuations help protect brands by providing evidentiary support of value. The exercise also helps management teams understand valuable business information that can help set future strategy, including: the historical records and financial projections associated with the trademarks, name recognition, advertising expenses and results, competitive landscape, and more. Trademark and intellectual property valuations help assess a business’s current market value, and provide key insights on how to increase the value over time. Valuations are also a common requirement for mergers and acquisitions, bankruptcy proceedings, trademark sale and/or purchase, tax reporting, litigation support, and determining royalty rates for licensing purposes.
Trademarks are how you communicate with the world, how clients find you, and how others assess you. Ensuring that you’ve done all you can to secure your trademarks is a necessary step to take for your business. And because trademarks can appreciate in value over time, consider seeking periodic valuations as a way to measure long-term growth.
Patent infringement is becoming an increasingly common issue facing established companies. If your company has developed a progressive product or service that meets a specialized need in your industry, businesses will attempt to replicate your success.
As the threat of patent infringement continues to rise, it becomes necessary for businesses to protect themselves. The first level of protection is to file for a patent with the U.S. Patent and Trade Office (PTO), which grants you legal protection against competitors who want to steal your products or authentic business ideas. However, obtaining a patent is only one layer of protection; the government has no legal obligation to guard your business against any violations—that responsibility rests on your shoulders.
According to the Patent and Trade Office, patent infringement can cost businesses an average of $250 billion and over 750,000 jobs every year. Every month, stories of patent infringement litter the news cycle and showcase how commonplace the reality of these issues are. Just recently, BlackBerry sued Facebook for incorporating features into their messaging app that infringed upon BlackBerry’s patents, proving that even well-established companies like Facebook are not above using another company’s information for their own gain.
If a competitor tries to replicate, use, or sell your patented invention, it warrants legal action. This is why patent valuations are so critical for businesses. A patent valuation not only proves the overall worth of your company, but corporations and law firms seeking retribution for patent infringement require a patent valuation to validate loss of income in court. It is your right to not only request an injunction to prevent additional losses by stopping the violator, but ask to be compensated for damage and losses to your brand.
Because patent infringement lawsuits are timely and expensive, it may be beneficial to pursue a few options before taking legal action. You or your attorney may attempt to contact the company in question to set up an in-person meeting in order to find a solution before taking it to court. Due to the complexity of patent infringement, a meeting will not always end with a resolution, which is when a court case may be necessary.
In the event the infringement suit is taken to court, it is important that you not only have an attorney to represent you, but an appraiser as well. The defendant will do everything in their power to question your patent’s validity and point out any inconsistencies in language. If you don’t have expert representation, you risk losing your case.
At Appraisal Economics, our team is experienced at providing expert witness testimony in court. We fight to protect your patent and brand, and to not only ensure that you are compensated for the full monetary amount you lost at the hands of your infringer, but to protect your patent against future infringement.
Investors love renewable energy. This influx of money, paired with growing market demand for solar energy, has caused rapid market growth. Globally, the International Energy Agency (IEA) estimates that solar energy’s share of energy production will soon account for more than two percent of global energy generation. In the U.S., the value of the solar market was $23 billion in 2016, and has grown by approximately 68 percent every year over the past decade. The market valuation of solar generation assets remains a source of tension between regulators, developers and investors, as these entities struggle to best structure asset appraisals.
Standards vary based on the purpose of the valuation, but the most common valuations will be based upon fair market value (FMV). FMV is calculated any number of ways, but solar valuations are most useful when integrating an approach that draws upon cost, income and market based valuation methods because each reveals relevant information that can be weighted appropriately depending on the situation.
The cost approach considers either the costs to reproduce identical assets, or looks at the replacement cost of the assets. From a valuation perspective, it is often the least reliable calculation of the three. It does, however, provide a relevant data point for estimating FMV. After all, buyers do not want to pay more for existing assets than it would cost to develop something similar. In circumstances where this model provides a higher indication of value than the other two approaches, perhaps due to a below-market power purchase agreement (PPA), the cost approach should be given less weight in a final valuation. Likewise, in situations where the cost approach produces an asset appraisal that’s lower than other methods, this may also justify a heavier reliance on other methods, because a seller may demand the additional value.
An income approach relies on the asset’s expected earnings capacity. This approach is often the most relevant approach for pricing solar assets, as it takes historical financial data, specific contracts and incentives into consideration. It’s most appropriate for solar assets when looking at discounted cash flow (DCF). This method analyzes all relevant factors an investor would typically examine, including economic benefits, risk and the liquidation time horizon. Its biggest weakness is its reliance on examining the estimated useful life of the system. Appraisers will likely still face difficulties determining the unleveraged discount rate or weighted cost of capital, as well as long-term equity and debt weighting. Tax attributes can also be difficult to project. All projections should be determined from the market participant’s perspective so that correct estimates can be reached for tax credits, depreciation, costs, financing rates and debt and equity weighting.
The market approach can be used when a number of comparable assets – stemming from the same geographic region – have recently switched hands in the larger marketplace. In this instance, valuation metrics is not for those transactions can be weighed. This is not always possible, though, and if sufficient comparable assets cannot be identified, the method is not useable.
Every power plant valuation is different, and likely riddled with its own inherent complexities and variables. This is why it’s so important to employ all of the above methods in these assessments, and analyze each data point in relation to its specific value within a given scenario.
Tangible property appraisals are a pivotal part of any business—whether you are an entrepreneur just starting out, or own a slew of profitable companies. Tangible personal property appraisals serve a variety of purposes, each one vital to the distinct operations of the business. Tax and financial reporting, property insurance, and ad valorem taxes are just a few commonplace examples of where these appraisals are necessary. More profoundly, asset appraisals affirm the value of your business. They legitimize your position to stockholders and disclose eminent information about the business during mergers and acquisitions.
Unbeknownst to many business owners, tangible personal property appraisals also serve another purpose in the business realm—protecting your business in the event of a move. Having to relocate your business is usually an exciting milestone; an achievement that signifies outgrowing a space to pursue even more opportunities. Whether you’re relocating your business to a bigger space across the street or traveling across state lines, a move poses risk of loss or damage to your items.
You can take precautionary measures to protect your items, but once they are in transit, everything is out of your hands. A tangible personal property appraisal serves as an extra protective measure if a moving-related casualty would occur at any point during the move. Tangible personal property includes everything from staplers to manufacturing equipment; office furniture to company vehicles. Anything that is not “nailed down” is considered to be a business’ personal property, but not all of these items require an appraisal. An appraisal expert will focus on valuing the costlier items—heavy machinery, computers, printers—over items that are not pertinent to the immediate needs of the business and are more inexpensive to replace—office decor, stationery, staplers.
Relocating a business is demanding and requires effort that is beyond the physical capacity of most companies. For this reason, business owners will hire a moving company to assist them with the move. These moving companies will offer you liability coverage—take it. However, don’t believe that it will be completely sufficient. If one of their staff misplaces an item or, even worse, causes irreversible damage to a piece of your property, the reimbursement amount they are responsible for paying won’t come close to covering the item’s full value. Your business insurance provider can help compensate for this loss by covering the remaining cost of repairing or replacing the item, though.
You should work with an appraiser to value your business’ expensive property well in advance of your move. Ideally, no property will be lost or damaged during your move, but if something were to happen, your insurance provider will need to see proof of value. Your appraisal report will serve as a testament to what your property is worth so that you are guaranteed reimbursement for the full amount. If the appraisal is not done in advance, you prohibit yourself from asking for the full market value of your property.
Give yourself peace of mind before your big move by working with Appraisal Economics. Our asset valuation services provide a more detailed and accurate process in determining the value of your tangible personal property.
When something is in high demand, its inherent value rises through new-found popularity as the product or service becomes more covetable to consumers. The monetary value of the product or service then increases proportionately to reflect its desirability, a pattern that is consistent across all industries.
Every market ebbs and flows with the economy; companies will experience waves of prosperity followed by periods of stagnation or downswings – all a normal part of business. The heavy machinery industry is no stranger to this fluctuation, but the global construction market has been trying to recover from a slump that has spanned over the last eight years. Low commodity prices, a weak economy, and various political events have caused heavy machinery sales to plummet from $102 billion in 2011 to $69.8 billion in 2016.
This downturn lasted much longer than anticipated, but the long-term direction for equipment sales is already on the upswing, so much so that it is predicted the industry will be up 28 percent by 2020. Dump trucks and excavators will see the quickest rise in value, but the demand for heavy machinery will continue to grow over the next four years.
The surge comes from the industry’s need to offset the issues resulting from the aftermath of the last financial crisis. The effects of the crisis not only hit North America hard, the rest of the world felt its consequences as well.
This projected growth answers to the growing population; as the population expands, more properties will need to be erected in order to accommodate more citizens, especially in developing countries across the globe. What this means for heavy machinery is this: a high demand for equipment means more valuable machinery. The best thing you can do for your business is to get an up-to-date valuation of all your equipment, used and new.
An equipment appraisal will benefit you in two ways: it creates a bargaining opportunity for you within the market to forge your own growth, and it also provides you with accurate documentation.
As the construction industry hits another peak, the market will become more saturated. If you get ahead of this growth, it will give you a competitive advantage. It will also ensure that no one else profits off of your gain, i.e., if you see a hike in taxes just because your equipment is more valuable.
In response to a prosperous market, more machinery will start being manufactured; this new equipment will be a commodity for some. On the other hand, used equipment may be just as, if not more, valuable in certain circumstances. Heavy machinery can be a hefty investment at first, which makes used equipment more desirable. You can do the same quality of work without having to make a huge financial sacrifice at first.
Being in the world of heavy machinery, it’s your due diligence to take advantage of this market at the start of a booming – and prosperous – future. An equipment valuation will benefit your company as you poise yourself for success.