How Valuation is Done for License and Permits
When licenses and permits, or the business that owns them, are for sale or the subject of litigation, they may be valued.
The first step toward success is to get started. It is not easy to start a business, but the country has made great progress in recent years, making it much easier for firms to get started. The government of a town or state issues licenses and permits to allow businesses to operate. In order to start a business anywhere, an individual must first obtain a business license.
License and permit valuation in business
A license is a governmental or other authority to carry out specific actions, such as selling regulated items (such as drugs or alcohol) or operating in regulated sectors (such as food services or firearm sales). Barbers, taxi drivers, doctors, lawyers, and other professionals who practice in regulated professions are also awarded licenses.
On the other hand, permits are approvals from an authorized public person or body to carry out specific actions. Permits for construction, logging, and the environment are among the most prevalent. When licenses and permits, or the business that owns them, are for sale or the subject of litigation, they may be valued. For estate planning and tax considerations, a valuation may be required.
What is a business license?
A business license is any type of permit or license that a state or other government organization requires firms to have in order to operate. For a variety of commercial activities, federal, state, and municipal agencies issue numerous sorts of business licenses and permits.
To start and run a business in a specified territory, you’ll need a business license. It is legally received from the state licensing authority in order to register the firm officially. The type of licenses and permissions required by a firm is determined by the industry and area in which it operates.
What are business permits?
A legal document certifies that a structure complies with specific local or state rules governing structural appearances, safety, and product sales. Depending on the type of business you own, you may need to obtain permissions such as a seller’s permit, an air department permit, an air pollution permit, a health department permit, and a sign permit to demonstrate compliance with local and state laws.
Types of licenses and permits for business
There are various types of licenses and permits for business; some of them are explained below:
- Fictitious name/DBA – A DBA informs the public about the true owner of a business. A fictitious business name, or assumed business name, is another term for a DBA. It began as a method of consumer protection, preventing dishonest business operators from avoiding legal difficulties by operating under a different name.
- Local business license – In addition to state and federal licenses, practically all firms will need a local government (city or county) license to operate legally within their jurisdictions. These local licenses are usually quite simple to obtain and only cost a small price.
- Special licenses and permits – These are the ones which are taken on for some specialized work or for some special occasions. These can also be taken up for a short duration of time. These might be taken under specific conditions and norms. Permits are required for inspections and safety rules regularly, and a person may be required to seek permits even after getting a business license.
Why does a business require licenses and permits?
Business licenses and permits give an owner/operator permission to run all or part of their business in a regulated environment. Governmental agencies or professional groups may issue the relevant rule. The goal of such regulatory agencies is to keep tabs on enterprises and persons that work in the field.
You’ll need a license to sell regulated goods, such as medications. To work in regulated areas such as health care, food service, or the selling of firearms, you’ll need a license. A license to practice medicine, law, or accounting in a regulated profession, such as medicine, law, or accounting, is required. Licensing for the sale of alcoholic beverages, permits for logging, salvage, construction, and environmental protection is also needed.
Difference between licenses and permits
Permits are usually transitory, whereas licenses are usually permanent. For example, in most places, a permit is valid for up to two years, whereas licenses are permanent, though they can be revoked if the license is used inappropriately.
Licenses contain few, if any, restrictions. Permits, on the other hand, come with a slew of restrictions. Permits limit the amount of time an activity can be carried out, who can carry it out, where it can be done, and whether or not supervision is provided. Most operations carried out under the authority of a license are not subject to such limitations. A driver’s license, for example, has no restrictions on where, who, or when you can drive as long as you follow the rules.
License and permit examples
The following are some instances of licenses and permits that are frequently required:
- Permission is granted by the Department of Health.
- Permits for zoning and property use
- Licenses for resellers
- Licenses for lotteries
- Business licenses in general
- Registrations for taxes
- As long as your health allows it,
- Occupational licenses are issued by the state.
- Liquor permits
License and permit valuation
Business licenses and permits are difficult to manage, yet they are required by law. If you’ve ever examined a business valuation for a customer, you’re aware that the final value usually includes tangible and intangible assets. When licenses and permits, or the business that owns them, are for sale or the subject of litigation, they may be valued. For estate planning and tax considerations, a valuation may be required.
Understand license and permit valuation
An individual or a business would not get an existing license or permit unless it was economically feasible. A change in general industry or economic conditions after the license or permission was first acquired may positively or negatively impact the value of the license or permit. For the purposes of a sale or conveyance to a third party, business licenses and permits may be appraised.
Licenses issued by government bodies are sometimes transferable to third parties, either on their own or as part of a business sale. Licenses and permits may also be valued for the purposes of allocating purchase price allocation in a business combination.
Why does a business need to value its license and permit?
Business licenses hold firms accountable for their activities and behavior, but also protect the public’s health and safety. Professional licenses indicate the level of competence and knowledge possessed by a specific professional. Furthermore, enterprises must get sales tax permits in order to sell taxable goods or services. The government uses grants to keep track of revenue for tax purposes.
How to value licenses and permits
A percentage of the business acquisition purchase price may be attributed to the fair value of the license or permit for financial accounting purposes. In the context of litigation, licenses and permissions are also valuable. When the plaintiff in a lawsuit alleges damages to the license or permit as a result of the defendant’s wrongful activities, such a valuation may be required. Any of the three widely accepted intangible asset valuation methodologies can be used to evaluate most licenses and permits.
License and permit valuation methods
The license and permit valuation methods are highly sensitive and are used to measure the accurate value and worth. The explanation of these methods is given below:
- Income approach – The analyst can use either the yield capitalization method or the direct capitalization method in the income approach. When using either income approach method, the analyst should take into account the remaining usable life (RUL) of the subject licenses and permits. To value the FCC license and expected license renewals, the analyst chose the income methodology and the multi period excess earnings method (MEEM). Licenses can be evaluated using the income approach if relevant income and spending data are available. The license value is determined using the income approach by computing the present value of the money earned by the owner/ability operators to conduct business as a result of the license.
- Cost approach – The analyst may use the replacement cost new less depreciation method and the reproduction cost new less depreciation method in the cost approach. Permits, such as environmental permits or building permits, are typically valuable intangible assets for the owner/operator. The owner/operator may not be able to operate the business without necessary permits. The cost approach is occasionally used to appraise licenses such as environmental permits.
Factors to consider when valuing licenses and permits
These are the factors that need to be considered while valuing the licenses and permits. They act as a tool for sustaining the business in the long run:
- Number of licenses and permits – The number of licenses and permits depends on what kind of business you are running, or it is also based on whether you want to do something commercial or something residential. Each sector requires a different number of licenses and permits.
- Replicate cost – The term replicate cost refers to the cost of the copy of a certain permit or license when it is valued. There might be chances of losing the documents. So the documents can also be replicated.
- Owner’s history – The following information is also included in the ownership history:
Current and previous debts include the most recent and previous mortgage amounts, construction loans, loan origination, maturity dates, each loan’s lenders, and any property liens and foreclosures.
- Service life and restrictions – Permits and licenses hold some life services along with some restrictions. These restrictions are also important to safeguard the privileges that these licenses and permits offer.
- Transferability – A license to attend a place of public entertainment may be transferred by the licensee unless a different intention is expressed or implied; nevertheless, except as aforesaid, a license cannot be transferred or exercised by the licensee or his servants or agents.
- Economic conditions – The current state of the economy in a country or region is referred to as economic circumstances. As an economy goes through periods of expansion and contraction, these conditions vary over time with the economic and business cycles.
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