In any consumer products and services business, maintaining strong customer relationships is important to long-term success. When consumer products and services businesses invest in developing, managing, and upgrading customer relationship assets, like customer lists, the information can be very valuable.
Think about it: you have a database of information from repeat customers about the types of purchases they make, how often they purchase things from you, and other details that could help you better market your products or services.
Although these customer lists often don’t require a valuation, there are times when they do, which is why we wanted to take a second and discuss how customer relationships are typically valued, and when you should inquire about our valuation services regarding your customer relationship assets.
When Is a Customer List an Intangible Asset Apart from Goodwill?
In order to accurately determine the value of customer lists, valuation experts will review the nature of the lists themselves and how much remaining economic life remains. Customer relationship assets have a finite life, and many decrease in value over time.
Factors that will affect the economic life of those assets include customer mortality, whether or not customer transactions are contractual in nature, the type of business, and if the business in question can offer an inherent advantage to its customers that its competitors cannot.
In some cases, economic life cannot be determined or the customer transactions are not separately identifiable. In these instances, those assets will be considered part of the goodwill.
When Is Valuation Necessary and How Is It Calculated?
The valuation of customer-related assets is necessary for allocating the purchase price in a business combination, certain transactions such as transfer pricing, and licensing, lending, and litigation. There are three general approaches to valuation: cost, market, and income. The cost and market approaches are generally not applicable for customer-related assets for various reasons, and so the income approach is most commonly used by valuation experts.
Within the income approach, there are a number of valuation methods used to value customer-related assets, including the multi-period excess earnings method (MPEEM), the distributor method, the with-and-without method, and the cost savings method. The MPEEM is often used when the customer-related assets are the primary income generating asset. If another asset is the most important valuable asset, then typically that asset will be valued using the MPEEM and the customers and other supporting assets will be valued using an alternative method.
At Appraisal Economics, we specialize in various valuations services for the consumer products and services industry, including the valuation of customer relationship assets and goodwill impairment. We encourage you to contact us today to learn about our methodologies and success stories.