Damodaran on Valuation

12.2. INDEPENDENT AND CASH-FLOW-GENERATING INTANGIBLE ASSETS

The simplest intangible assets to value are those that attach to a single product or product line and generate cash flows. These assets usually have finite lives, over which the cash flows have to be estimated, but they are qualitatively no different from many tangible assets that generate cash flows over finite periods. In this section, we will consider a few examples of such assets.

12.2.1. Trademarks, Copyrights, and Licenses

Trademarks, copyrights, and licenses all give the owner the exclusive right to produce a product or provide a service. As a consequence, their value is derived from the cash flows that can be generated from the exclusive right. To the extent that there is a cost associated with production, the value comes from the excess returns that derive from having the exclusive right.

As with other assets, we can value trademarks or copyrights in one of two ways. We can estimate the expected cash flows from owning the asset, attach a discount rate to these cash flows that reflects their uncertainty, and take the present value, which will yield a discounted cash flow valuation of the asset. Alternatively, we can attempt a relative valuation, where we apply a multiple to the revenues or income that we believe can be generated from the trademark or copyright. The multiple is usually estimated by looking at what similar assets have sold for in the past.

In making these estimates, we are likely to run into estimation ...