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How to Value Intellectual Property   
By JoAnn Lombardi, PresidentVR Business Brokers/Mergers & Acquisitions
Many businesses rely on some form of intellectual property (IP) to generate cash flow. And whether for infringement litigation, income tax reporting, accounting compliance, bankruptcy, divorce or strategic decision-making purposes, determining IP's value has become increasingly important.
First, it's important to understand what intellectual property is: 
A subset of intangible assets that is generated by human intellectual or inspirational activity, which can consist of patents, literary and musical copyrights, trademarks, trade names, and trade secrets. In most cases, companies or individuals must register IP for federal and state legal protection. 
Intellectual property doesn't appear on a company's balance sheet unless it buys it from an outside party. IP can generate significant value either through operating or licensing income.
Determining the Value of Intellectual Property 
This is done by starting with interviews and requests for relevant documents. This can include:
  • Registration papers;
  • Historic and projected financial statements;
  • Tax returns; and
  • Relevant licensing and royalty agreements. 
For IP valuations to be meaningful, collaboration with a VR M&A advisor is critical. Through interviews, we are able to understand IP rights as well as the underlying technology, life cycles, economic benefits, possible risk factors, highest and best use, and relevant marketplace. 
Approaches to Appraising IP 
After gathering preliminary information, it's time to crunch the numbers. Appraisers generally use, but may slightly modify, the three traditional valuation approaches when valuing IP: 
1. Cost approach. This estimates the cost to reproduce or replace an IP asset. The analysis includes direct costs (such as labor and materials) and indirect costs (such as legal, administrative, and research and development expenses). Valuators also consider a reasonable return for the IP developer. To estimate fair market value, valuators adjust reproduction or replacement costs for functional, technological, or external obsolescence.
2. Market approach. Comparable IP sales and licensing agreements can, in theory, provide objective support for IP values. But because IP often provides a competitive advantage, many companies carefully guard the details of IP transactions. Unearthing comparable transactions require an in-depth review of SEC filings or access to proprietary transaction databases. Possible selection criteria include the asset's:
Erring on the Side of Silence
By Peter C. King, CEO VR Business Brokers/Mergers & Acquisitions
This is the story of a successful acquisition made more than 25 years ago. The seller was the third or fourth largest manufacturer in its industry, with a 12% market share. The buyer and the seller's owners were so paranoid that information about the impending purchase might get out, they went to what some may consider extreme measures. But there's nothing wrong with a bit of paranoia when it comes to M&A.
The story starts with a blind ad placed by the seller in The Wall Street Journal. The potential buyer sent a letter to a confidential blind email address and shortly received a phone call from the M&A firm retained to sell the company.
The prospective buyer asked for specifics. "What kind of a manufacturer is for sale?" Response: "A metal products company." Next question: "What kind of metal products?" Response: "I have to get the seller's permission before I can reveal that." If that level of caution seems excessive, it isn't. After securing the authorization, the seller's representative called back and described the products.
Eventually, the buyer and seller reached an agreement in principle and the due diligence process began. The administrative staff had to be informed, for instance, because the buyer had to spend significant time on the premises conducting due diligence. Also, to learn more about the market, the buyer arranged with the seller to appear at the industry's next trade association meeting - the seller was a member - in the guise of a consultant to the selling firm. 
How to Sell and Successfully Launch Your Retirement
Many business owners are emotionally attached to their businesses, and it is easy to understand why. Typically, business owners invest not only a considerable amount of time and money into their business but a good bit of themselves as well. Owning and operating a business often becomes part of one’s identity. However, the fact is that no one will work forever, as retirement eventually comes for almost every business owner. With this in mind, it is important to prepare for selling your business well in advance.
Brokerage professionals can take your knowledge regarding your business, and use it to help you frame your business in the best possible light. Your expertise in your business can also help a broker find ways to improve your business so that it is more attractive to potential buyers. With all of this in mind, let’s turn our attention to the key steps you should take when preparing to sell your business and transition into retirement.
Select Your Second-in-Command 
Any savvy buyer will want to know that the business is well supported by a capable team. Buyers rightfully worry about having a smooth transition period, and nothing helps dispel those fears like having a proven and capable second-in-command standing by. When selecting this important individual, it is important that you pick someone that understands how your business works and is a proven asset to its operation.
Automate, Automate and Automate
Buyers can be intimidated by taking control of a business. Having a proven second-in-command ready to assist is one smart step. Automating as much as possible is yet another prudent move. In short, you want your prospective new buyer to feel more confident about buying and operating your business.
Make a “Smooth Transition” List
As the seller, you have the critically important job of removing buyers’ fears. When you boost their confidence that they can successfully run your business, you increase the odds that your sale will go smoothly. Making a smooth transition list, which includes all the steps that you can take to improve the odds of a buyer being successful, is a smart investment of your time and effort. 
A good transition list will include information about how to work with key customers, employees, and vendors. You want to ensure that your customers, employees, and vendors understand that a sale will take place, but also understand that the process will be smooth and trouble-free. Whether large or small, take any steps that you can to show buyers that the transition will be well-received.
The average business owner has, in fact, never sold a business before, and is unprepared for this very complex process. Since the process of buying or selling a business is a very complicated one, they should strongly consider working with an experienced Business Broker or M&A Advisor who can help guide them through the process. Brokerage professionals are experts at buying and selling businesses. They understand what both buyers and sellers want and need. As a result, they can help you take the necessary steps to get your business ready to be sold.
Is Now the Time to Cash in Your Trash Business?
Many family-owned companies in today’s economy are facing a similar dilemma: Should I sell my business now and take advantage of record asset prices, or ride the current economic boom for a couple more years and sell later when valuations may be even higher? Companies in the trash business are certainly wrestling with that question.
While it’s impossible to predict how long the post-pandemic prosperity will last, it’s probably even riskier to bet that current record asset prices and valuations will get even richer. And if that doesn’t happen, your business may be worth less, even if you grow revenue and earnings. So selling your business now may be a smarter move than sticking it out a few more years. Many owners have already come to that conclusion and cashed in.
If you’re still undecided, here’s some math you should consider:
Let’s say your company is worth 10X your current earnings, and you’re going to make $100,000 this year. That would value your company at $1 million. But what if you manage to increase your earnings in a couple years by 20%, or $120,000, but valuations fall by 20%, to 8X, over that same period? Your business will then be worth only $960,000, or $40,000 less, even though you grew earnings. Is it worth taking that gamble?
Then there’s the time value of money—the sooner you get money it’s worth more than if you receive it later, especially given the recent rate of inflation, which means tomorrow’s dollars will be worth less than today’s.
Another thing to consider is that you may need to make a major investment in your company in order to increase your revenue, but that may not pay off either. In fact, if multiples go back to 8X at some point in the future, as we believe they might, you are not incented to reinvest in your business.
One of the biggest expenses trash haulers have is in trucks. A new front loader might cost anywhere between $200,000 and $350,000. But the fact is you are not going to get any more for your business with a fleet of one- or two-year-old trucks then if you have a bunch of eight-year-old trucks. (If you have 10- or 12-year-old trucks that’s a different story). So if you’re going to keep your business for two more years and improve earnings by 20% but have to buy new trucks to get there, that’s money you are probably not going to get back when you sell.
Window Sales and Installation CompanyWake County, NC
Well Established Window Company with over $900,000.00 in sales with almost no overhead. Profit-making machine with tremendous upside potential. A Must see an opportunity for the serious operator or investor.
The Home Improvement Industry is one of the fastest-growing sectors in the nation as well as one of the most stable, and windows top the list of what customers replace first.
This Sales and service firm offers customers award-winning windows and patio doors that are significantly better than most in the market at a price that wins customers over and over again. Those happy customers tell their friends and give great reviews which in turn generates even more calls that turn into more new customers. They actually have more customers than they can keep up with. That’s how high the demand is in the Triangle market.
?For more information contact: Neal Isaacs at Neal@VRbizTriangle.com.
VR Located in Denver, CO Sold a Home Care Provider for $1,295,000.
With 20 years of continual growth, this company serving the Denver metro area offered a great business opportunity as well as a strong platform for new growth. The company was licensed to provide non-medical personal care, meal preparation, housekeeping, laundry, and general hygiene services, etc. The staff included a very stable and well-trained core of caregivers supported by an experienced administrative staff that allowed the owner to focus on new growth through an established network of referrals. The business model provided weekly payments, virtually no bad debt, and a very limited inventory.
Congratulations to Jeff Child for your successful closing.
For more information contact: jchild@vrmilehigh.com.
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