Valuation for Intangible Assets in Cross-Border M&A

Executive Summary

Cross-border M&A transactions are primarily driven by intangible assets — brands, patents, software IP, and customer relationships often comprise over 70% of the purchase price. Valuing these assets across jurisdictions brings unique challenges which include different accounting frameworks, tax treatments, and market conditions. This article presents a framework for valuing intangibles in cross-border deals, focusing on compliance with Ind AS, IFRS, and OECD transfer pricing guidelines.

1.Why Intangible Asset Valuation Matters in Cross-Border M&A

• Value Concentration – In sectors like tech, pharma, and consumer goods, intangibles dominate the balance sheet. In the S&P 500, intangible assets now represent approximately 90% of market value, a dramatic increase from 17% in 1975.
• Tax Implications – Improper valuation can trigger transfer pricing disputes.
• Regulatory Scrutiny – OECD BEPS 2.0 requires proof that pricing of intangibles aligns with value creation.
• Hidden Gems – Intangible assets are like hidden gems as most of the time these are not reflected on the balance sheet of company due to restrictions in various accounting frameworks like IFRS to recognize internally generated intangible assets.

2. Categories of Intangible Assets in M&A

As per the International Valuation Standard 210 on Intangible Assets, these are categorized into following types

• Marketing-related – These assets are used primarily in marketing and promotion of products and services and include brands, trademarks, trade names, internet domain names, etc.
• Technology-related – These assets arise from the use of technology, databases, formulae, patents, proprietary software, trade secrets, etc.
• Customer-related – These represent value of rights that arise from contractual arrangements and include licensing and royalty agreements, non-compete contracts, natural resources rights, etc.
• Artistic-related – These assets include right to benefits from artistic works like plays, books, music, etc and examples of intangible assets include copyrights, design rights, etc.
• Customer-related – These assets include customer lists, order book backlog, customer contracts, etc.

3. Valuation Approaches for Intangibles

Valuation approaches as with any other valuation assignment are classified into 3 broad approaches – Market Approach, Income Approach and the Cost Approach. The selection of any approach depends on the data availability and the circumstances of the case.

1.Market Approach – The value of intangible assets is determined by reference to market activity for example transactions involving similar or identical assets. This approach should be applied in the case sufficient Information is available on arm’s length transactions of similar or identical intangible assets. Examples of intangible assets for which market approach is sometimes used is

• Broadcast or telecom spectrum
• Internet domain names
• Mining licenses sold by the government

2. Income Approach – The value of intangible asset is determined by reference to the present value of future expected cashflows, income or cost savings from the assets over its economic life. Following methods can used under Income Approach

1.Excess earnings method: The excess earnings method estimates the value of an intangible asset as the present value of the cash flows attributable to the subject intangible asset after excluding the proportion of the cash flows that are attributable to other assets required to generate the cash flows (“contributory assets”).

2. Relief-from-royalty method: Under the relief-from-royalty method, the value of an intangible asset is determined by reference to the value of the hypothetical royalty payments that would be saved through owning the asset, as compared with licensing the intangible asset from a third party. Conceptually, the method may also be viewed as a discounted cash flow method applied to the cash flow that the owner of the intangible asset could receive through licensing the intangible asset to third parties.

3. Premium profit method or with-and-without method: The with-and-without method indicates the value of an intangible asset by comparing two scenarios: one in which the business uses the subject intangible asset and one in which the business does not use the subject intangible asset (but all other factors are kept constant).

4. Greenfield method: Under the greenfield method, the value of the subject intangible is determined using cash flow projections that assume the only asset of the business at the valuation date is the subject intangible. All other tangible and intangible assets must be bought, built or rented.

5. Distributor method: The distributor method, sometimes referred to as the disaggregated method, is a variation of the multi-period excess earnings method sometimes used to value customer-related intangible assets. The underlying theory of the distributor method is that businesses that are comprised of various functions are expected to generate profits associated with each function. As distributors generally only perform functions related to distribution of products to customers rather than development of intellectual property or manufacturing, information on profit margins earned by distributors is used to estimate the excess earnings attributable to customer-related intangible assets.

3. Cost Approach – The value of an intangible asset is determined based on the replacement cost of a similar asset or an asset providing similar service potential or utility. Replacement cost and Reproduction cost are the main methods under this approach.

The cost approach is commonly used for intangible assets such as the following:

(a) acquired third-party software,

(b) internally developed and internally used, non-marketable software, and

(c) assembled workforce.

4. Cross-Border Complexities

• Currency Translation Risk – Exchange rate volatility impacts valuation assumptions.
• Differing Legal Protections – IP rights enforcement varies significantly across countries.
• Tax Jurisdictions – Some countries have lower withholding taxes on royalties; others have strict transfer pricing audits.

5. Best Practices for Cross-Border Intangible Valuation

• Use local market benchmarks for royalty rates and discount rates.
• Engage multi-country legal teams to confirm IP rights enforceability.
• Ensure transfer pricing compliance under OECD Guidelines.

Conclusion

Intangible asset valuation in cross-border M&A is a balancing act between local market realities, global compliance, and strategic deal objectives. For Indian businesses, getting this right can avoid disputes, optimize tax outcomes, and secure higher valuations from foreign acquirers.