FAIR MARKET VALUE AND INTANGIBLE ASSETS ARE ENTRENCHED IN UNITED STATES LAW


Fair market value and intangible assets play a pivotal role in various aspects of US law, shaping legal frameworks in taxation, employment, securities, and more.

Fair market value and intangible assets are deeply entrenched in various US laws, including:

Internal Revenue Code (IRC):

  • Section 1012: Defines fair market value as the price at which property would change hands between a willing buyer and seller, considering relevant facts.
  • Section 197: Allows amortization of goodwill and intangible assets acquired in certain transactions.
  • Section 2701: Imposes valuation discounts on gifts of specific intangible assets.

ERISA:

  • Section 401(a)(26): Defines fair market value for determining the fair value of employer contributions to qualified plans.
  • Title VII of the Civil Rights Act of 1964:
  • Section 706(g)(a): Requires the use of fair market value for calculating back pay awards in employment discrimination cases.

Fair Labor Standards Act (FLSA):

  • Section 203(m): Requires employers to pay employees their fair market wage for services.

Securities and Exchange Commission (SEC) Rules:

  • Rule 10b-5: Prohibits fraud in securities transactions, including misleading valuations.
  • Rule 33-80b: Requires disclosure of estimated fair value of assets and liabilities in SEC filings.

These laws form the foundation, with their specific requirements and interpretations varying based on the context and purpose of valuation.

In addition to federal laws, many states have their own regulations governing property valuation, including intangible assets. Consulting legal and financial professionals ensures appropriate methodology for specific purposes.


SPECIFIC CASES OF INTANGIBLE ASSETS IN US LAW

While federal laws provide a broad framework, specific legal cases deepen the role of intangible assets in various contexts such as M&A, taxation, bankruptcy, and litigation.

Mergers & Acquisitions (M&A):

  • Determining purchase price: Intangible assets influence acquisition prices, subject to scrutiny for fair market value considerations.
  • Goodwill accounting: Excess purchase price over identifiable assets is considered goodwill, an amortizable intangible asset.

Taxation:

  • Transfer pricing: Intangible assets influence cross-border transactions and profit shifting regulations.
  • Intellectual property (IP) taxation: Royalties from licensing intangible assets are taxable income.

Bankruptcy:

  • Valuation for liquidation: Intangible assets impact asset valuation in bankruptcy.
  • Preferential transfers: Transferring intangible assets before bankruptcy may face scrutiny for fair distribution.

Litigation:

  • Trade dress infringement: Copying unique product designs is recognized as intangible asset infringement.
  • Trademark dilution: Using similar trademarks weakening established brands can lead to legal action.

These examples demonstrate the pervasive role of intangible assets in legal scenarios, affecting business transactions, taxation, financial reporting, and litigation.


THE RISE OF INTANGIBLE ASSETS: A FOUR-DECADE JOURNEY

This timeline traces the remarkable ascent of intangible assets over four decades, from constituting 17% of the market value of US non-financial corporations in 1975 to a staggering 90% by 2020. Key studies and reports have contributed to understanding this transformation, reflecting the dynamic forces of technological advancements, globalization, and the knowledge-based economy.

1975: Intangible assets comprise around 17% of the market value of US non-financial corporations, marking the initial phase of a shift towards intangible-driven value creation.
2001: The Intellectual Asset Valuation Study estimates that intangible assets account for 70% of the market value of US non-financial corporations, providing early evidence of their increasing importance.
2005: The Corrado et al. study estimates that 80% of the market value of US non-financial corporations is attributed to intangible capital, laying the groundwork for future research and discussions about the growing importance of intangibles.
2009: Sveiby's "The Intangible Economy" argues that intangible assets already constitute over 80% of the value of S&P 500 companies, emphasizing the shift towards intangibles as a primary value driver.
2010s: National Bureau of Economic Research (NBER) working papers and Brookings Institution reports contribute significantly to the growing body of evidence and academic discourse surrounding intangible assets.
2018: The Ocean Tomo study estimates that intangible assets comprise 78% of the total value of publicly traded companies in the US and UK, signaling the continued ascent of intangibles.
2020: The Ocean Tomo "Intangible Asset Market Value Study - Interim Results" delivers groundbreaking findings, revealing that intangible assets account for 90% of the market value of S&P 500 companies. This report serves as a watershed moment, solidifying the dominance of intangible assets in the modern economy.
2022: Recent studies indicate that intangible assets now account for over 90% of the market value of publicly traded companies in the US and Canada, reinforcing the centrality of intangibles in driving business success.


Significance:

  • The timeline demonstrates the rapid and sustained rise of intangible assets, highlighting their growth from 17% in 1975 to 90% in 2020.
  • It emphasizes key studies and reports that contributed to the recognition of intangibles' importance.
  • The timeline underscores the dynamic forces, including technological advancements, globalization, and the knowledge-based economy, driving this remarkable growth.
  • The culminating 2020 Ocean Tomo report is pivotal, solidifying the centrality of intangible assets and prompting widespread discussions about their transformative impact.
  • The trajectory of intangible assets reflects the evolving nature of the modern economy, where knowledge, innovation, and brand value increasingly determine a company's worth. Moving forward, it will be intriguing to observe how intangibles continue to reshape the business landscape and the global economy.

EXPERIENCE

When practitioners with 10 to 20 years of experience as business owner-operators employ the Eric Jordan "25 Factors Affecting Business Valuation" methodology, positive results ensue.

Comprehensive Analysis:

  • Considers 25 factors, ensuring a thorough examination of both tangible and intangible assets.
  • Provides a structured and transparent framework for valuation.

Reduction of Bias:

  • Mitigates subjective judgments through a systematic approach.
  • Promotes consistency in valuation outcomes.

Defensibility:

  • Transparent methodology offers a clear basis for valuation, facilitating communication with stakeholders.

The Strengths of Business Ownership Experience:
Intuition and Insight:

  • Developed through years of navigating the business landscape.
  • Offers an intuitive understanding of market dynamics and customer needs.

Identifying Hidden Value:

  • Practical experience helps recognize intangible assets often overlooked in a purely data-driven approach.

Skin in the Game:

  • Personal accountability fosters a deep understanding of the financial implications of valuation decisions.

The Synergy: Combining Methodology and Experience:

Structured Foundation:

  • Eric Jordan methodology provides a solid and structured foundation for valuation.

Interpreting Data:

  • Experience aids in interpreting data, identifying hidden value, and making informed judgments.

Advantages in Unique Situations:

  • Particularly advantageous when intangible assets dominate the business's value.
  • Effective in situations with limited historical data or when stakeholders have diverse perspectives.

The contemporary business environment witnesses a paradigm shift, with intangible assets frequently representing a substantial portion, averaging around 90%, of a company's market value. In navigating this intricate terrain, the Eric Jordan "25 Factors Affecting Business Valuation" methodology emerges as a robust and comprehensive tool.

This methodology encompasses a diverse set of 25 factors, carefully curated to capture the nuances that influence business valuation. The evolving nature of business, marked by the ascendancy of intangible assets, necessitates an approach that goes beyond traditional metrics. The Eric Jordan methodology addresses this need by offering a holistic view that includes factors like brand equity, customer relationships, and intellectual property.

The distinctiveness of this methodology becomes more pronounced when wielded by individuals with 10 to 20 years of hands-on business ownership experience. The practical insights gained from actively managing and operating a business bring a unique perspective to the valuation process. Business owner operators possess an intimate understanding of how various factors impact day-to-day operations and contribute to the overall value of a business.

In the context of intangible assets, which have become predominant in modern business, the Eric Jordan methodology excels. The 25 factors encapsulate the intricacies of intangibles, acknowledging their evolution over time. This dynamic perspective is crucial in an era where the value of brands, patents, and customer goodwill often surpasses that of tangible assets.

The critical role of business owner operator experience cannot be overstated. Individuals with a decade or two of hands-on involvement bring a depth of understanding that transcends theoretical assessments. Their familiarity with the challenges and opportunities of running a business adds a layer of practicality to the valuation process, ensuring that the methodology aligns seamlessly with the real-world dynamics of private enterprises.

IN CONCLUSION

The Eric Jordan "25 Factors Affecting Business Valuation" methodology, when coupled with the experience of business owner operators, brings venture capital thinking down to street level.This is firmly embedded in the legal system of the western world and beyond. This stands out as the optimal path for valuing private businesses in today's landscape dominated by intangible assets. This approach not only acknowledges the shift in valuation dynamics but also leverages practical insights to deliver a nuanced and accurate assessment of business worth. This is what differentiates the “25 Factors”.

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