Valuing Hidden assets

Hidden assets

In addition to assets appearing on a going concern’s balance sheet, numerous resources bearing value do not appear under GAAP. These so-called hidden assets include:

• Brand-name identity
• Product qualities
• Know-how
• Employee training
• Specialized production
• Distribution arrangements.

For example, a new entrant might need to invest in research and development (R&D) to replicate the target company. The exact value is difficult to estimate.

An informed guess can be made by estimating the life cycle of the resulting product and multiplying this by the target’s average annual level of R&D expense.

For a patented pharmaceutical, for example, product life could be up to the 17-year life of a patent. So if the company spends 5 percent annually on R&D for its patented products, an amount equal to about 85 percent of current revenues would be warranted.

Similar estimating is appropriate to value customer relationships. These take time and resources to build. They may be judged by some multiple of the target’s annual selling and administrative expenses – perhaps between one and three years’ worth of these.

Additional estimating goes into other hidden assets such as

• government licenses,
• franchise agreements, and
• other valuable resources

that are not listed on a balance sheet under standard accounting rules.


Also read:
1.Balance Sheet Value: Assets at Work
2.Reliability of financial data
3.Asset valuation approach in liquidation
4.Asset valuation approaches in active companies
5.Valuing Hidden assets
6.Subtracting liabilities in asset valuation
7.Balance Sheet Value: Summary