How to Value Customer Related Assets
When determining the fair value of customer-related assets in the context of a business combination, the valuation exercise must take into account the relative contributions and values of all of the company’s assets.
Customers’ connections may require significant human and financial resources to create, maintain, and update. In a broader sense, customer-related intangible assets are the data gathered from repeat transactions, whether or not there are underlying contracts. Companies can lease, sell, acquire, or otherwise trade such data, which is typically arranged as customer lists or databases.
Customer-related assets valuation in business
All of Target Company’s rights, title, and interest in, too, and of the Customers, all Customer accounts (including, without limitation, all Assets Under Custody in such accounts and all deposits in and related to such accounts), all Customer Account Information, all documentation related to such Customer accounts, and all contracts and agreements with such Customers (including, without limitation, program master service agreements and master service agreements) come under the customer-related assets valuation in business.
What are customer-related assets?
Customer lists, order or production backlog, customer contracts, related linkages, and non-contractual customer relationships are all examples of customer-related assets. The Valuation Advisory’s goal is to lay forth best practices for valuing customer-related assets for financial reporting purposes.
Types of customer-related assets
Customer-related assets comprise the customer relationships, customer lists, order books, or order databases which are explained below:
- Customer Relationships – For businesses in a variety of industries, customer relationships are a valuable intangible asset. Customer connections require a large amount of human and financial resources to build, maintain, and upgrade. In some cases, supplier or customer contracts result in intangible assets that can be identified. On the other hand, customer-related intangible assets are information acquired via recurrent transactions, whether or not there are underlying contracts. Companies can and do lease, sell, acquire, or otherwise trade such data, which is typically arranged as client lists.
- Customer Lists – Customer lists are one of a company’s most valuable assets. One element that determines the worth of your firm at the time of sale or merger is the potential for continuous revenues from existing clients. But, more crucially, your customer list is critical to your business’s long-term success.
- Order Book or Order Database – The number of shares being bid on or offered at each price point, or market depth, is listed in an order book. It also identifies the people who place the buy and sell orders, but some prefer to remain anonymous.
Why are customer-related assets important in business?
Intangible assets tied to customers provide value for a limited time. Customer lists decline over time without efforts directed toward continuous reinforcement due to customer mortality, the ravages of competition, or the advent of alternative products and services. The mechanics of present value arithmetic further erodes the economic gains of sales to current customers in the distant future. Customer relationships are squandering assets whose economic value diminishes with time.
Intangible assets associated with customers rely on the existence of other assets to offer value to the company. In order to create products or provide services, the majority of assets, including fixed assets and intellectual property, are required. The act of selling these items and services allows businesses to create relationships with clients and collect information from them. As a result, the value of these partnerships is determined by the firms’ future capacity to sell additional products and services. As a result, a number of other assets must be in place for businesses to extract value from customer-related assets.
Customer-related assets valuation
Intangible assets derived from repetitive transactions, with or without underlying contracts, are known as customer-related intangible assets. Companies can and do lease, sell, acquire, or otherwise trade such data, which is typically arranged as client lists.
Understand customer-related assets valuation
When determining the fair value of customer-related assets in the context of a business combination, the valuation exercise must take into account the relative contributions and values of all of the company’s assets. The purpose of this section is to concentrate on the factors that influence the valuation of customer-related assets; however, some factors might equally be applied to other assets acquired in a business combination that does not have an easily observable market value. The valuation specialist must comprehend the relative contribution of all assets to the organization’s entire cash flow or profit.
Why is customer-related assets valuation important?
The single most essential asset class for businesses is customer interactions. Customer relations account for 18% of total enterprise value on average. The valuation is to lay forth best practices for valuing customer-related assets for financial reporting purposes.
- For impairment testing – ASC 350 Intangibles – Goodwill and Other presently requires (at least) an annual multi-step goodwill impairment test. Firms estimate the fair value of the reporting units being tested in Step 1. Step 2 of the test is triggered when the carrying amount of a reporting unit exceeds its fair value. Step 2 requires companies to calculate the fair value of all identified assets in the reporting units, including any customer-related intangible assets.
- For acquisition accounting – ASC 805 Business Combinations requires enterprises to recognize and measure the fair value of acquired identifiable assets, including any customer-related intangible asset, following business or asset acquisitions. There may be some exclusions for private businesses.
- Allocation of the purchase price – Certain activities, such as transfer pricing and licensing, financing, and litigation, require allocating the purchase price in a business combination. Cost, market, and income are the three general approaches to valuation. Because the cost and market approaches are often inapplicable to customer-related assets for a variety of reasons, valuation experts prefer to utilize the income approach.
How do you value customer-related assets?
Maintaining excellent client relationships is critical to long-term success in any consumer products and services firm. Client relationship assets, such as customer lists, can be extremely valuable when consumer products and services companies spend on establishing, managing, and updating them. Although these client lists don’t always require a valuation, there are occasions when they do, which is why we wanted to take a moment to talk about how customer relationships are normally valued and when you should inquire about our customer relationship valuation services.
Methods of valuing customer-related assets
When it comes to allocating intangible assets, valuing customer connections is critical. This engaging course covers a wide range of issues that affect the quality, predictability, long-term viability, and potential of client assets. This webinar presents an in-depth discussion of the following fundamental approaches for estimating the value of customer relationships, as well as some examples to go along with it.
1. Income Approach
The multi-period excess earnings method (MPEEM), the distributor method, the with-and-without technique, and the cost savings method are all examples of valuation methodologies used in the income approach to evaluate customer-related assets.
- Multi-Period Excess Earnings Method (MPEEM) – When customer-related assets are the principal source of income, the MPEEM is frequently used a financial valuation methodology that estimates revenues and cash flows resulting from an intangible asset and then deducts sections of the cash flow that can be attributed to supporting assets, such as a brand name or fixed assets.
- With or Without Method is a financial valuation methodology that estimates revenues and cash flows resulting from an intangible asset and then deducts sections of the cash flow that can be attributed to supporting assets, such as a brand name or fixed assets.
- Distributor Method – The Distributor Method, a version of the MPEEM, values customer relationships using market-based distributor data or other applicable market inputs. It’s also known as a profit split method because it allocates function-specific earnings to the identified assets.
2. Market Approach
The market approach is a method for calculating an asset’s worth based on the selling price of similar assets. Along with the cost technique and discounted cash-flow analysis, it is one of three main valuation methodologies (DCF).
3. Cost Approach
The cost approach is commonly used to evaluate customer databases or associated intangible assets, as well as to estimate the value of customers’ informative content and basic demands. This also aids in determining a variety of other expenses that have risen.
Factors to consider while valuing customer-related assets
In most cases, the most essential and valuable customer-related intangible obtained after a business acquisition is customer connections. Here are the factors which are extremely important for valuing customer-related assets:
- Repeated trade – It is important for the customers to understand that while valuing any assets, there must be a repeated rate of the trade, which must be used as a parameter to consider these customer-based assets. If there are repeated trades, then valuation tends to increase at a higher level.
- Time period – The valuation is based on the time period that one holds, and it is extremely imperative. Timely intervention helps in knowing the market relations and positioning in the market.
- Dependency on other assets – A dependency occurs when one thing relies on the other and cannot function without the other. A dependency is represented by a link between one entity and the other entities it interacts with.
Get expert help valuing customer-related assets with Eqvista!
If you want to discover how much your company is worth, you should seek the advice of a professional. Our highly skilled valuation team at Eqvista can assist you in determining the worth of your customer-related assets. Getting a valuation of your customer-related assets has become a crucial part of growing your company. To learn more about our valuation services, please contact us.