Damodaran on Valuation

12.3. FIRMWIDE CASH-FLOW-GENERATING INTANGIBLE ASSETS

The intangible assets that attract the most attention and have the greatest value tend to be difficult to isolate and value. They do not generate cash flows on their own, but they allow a company to charge higher prices for its products and generate more in cash flows. As a consequence, valuing these intangible assets is more difficult to do, but there are three different ways we can go about estimating their value.

1. Capital invested. We can estimate the book value of an asset by looking at what a firm has invested in that asset over time. With brand name, for instance, this would require looking at advertising expenditures over time, capitalizing these expenses, and looking at the balance of these expenses today that remains unamortized. While this approach is the least subjective, it may not match or even be close to the market value of the asset. It is, however, consistent with how accountants measure the value of other tangible assets on the books.

2. Discounted cash flow valuation. We can discount the expected incremental cash flows generated to the firm by the intangible asset in question. This will require separating out the portion of the aggregate cash flows of a firm that can be attributed to brand name or technological expertise and discounting back these cash flows at a reasonable discount rate.

3. Relative valuation. One way to isolate the effect of an intangible asset such as brand name is to compare how the market values ...