Damodaran on Valuation

Chapter 12. The Value of Intangibles

It is human nature to draw a distinction between the assets that we can see and feel and the assets that we cannot and to feel a little more secure about the former. Included in the latter, though, are assets as diverse as goodwill, brand name, loyal employees, and technological prowess. A common critique of valuation approaches in general and financial analysts in particular is that we pay little attention to intangible assets and consequently undervalue them.

In this chapter, we confront this criticism by looking at intangible assets across the spectrum. We begin by looking at intangible assets that stand by themselves and generate cash flows—commercially developed patents, copyrights, trademarks, and licenses—and argue that conventional discounted cash flow (DCF) models do a more than adequate job in valuing them. We follow up by looking at intangible assets such as brand name and corporate reputation that generate cash flows collectively for the business that owns them, but are more difficult to isolate and value independently. Nevertheless, we will argue that conventional discounted cash flow valuation models can capture their values and that adding a premium for them afterward can result in double counting. In the last part of the chapter, we look at the most elusive intangible assets (i.e., those that have the potential to generate cash flows in the future but do not right now). Included in this group will be assets as diverse as undeveloped ...