Avoid Double Counting Intangible Assets in Business Valuations

There’s a common misconception regarding how to assess the value of companies heavily reliant on an intangible asset for its revenue stream. It’s often assumed that the value of such assets should be added to the overall enterprise value. This would mean separately valuing the intangible asset and then combining it with the business’s going concern value. This misunderstanding is especially prevalent in industries where upfront costs for intangible assets are substantial – liquor stores probably being the most common example in SBA guaranteed lending. With the high upfront cost of the liquor license, it’s no wonder the seller of a liquor store would want to be confident they are receiving proper compensation.

Consider a liquor store where possessing a valid liquor license is required for legally selling alcohol. Without it, the store couldn’t generate any revenue from alcohol sales. Therefore, a business valuation that factors in the cash flows from alcohol sales inherently accounts for the value of the liquor license. Take the following example of a hypothetical liquor store:

The overall business value is dependent on liquor sales. This connection between the liquor license and the business’s resulting cash flows makes the license’s value inseparable from the overall business value. In the above example, the $900,000 concluded business value includes the liquor license value.

However, there are specific scenarios where a separate appraisal of the liquor license becomes necessary during the valuation process:

For instance, some liquor stores may struggle due to mismanagement, owner health issues, tough local competition, or underreported revenue, making them unsuitable for traditional profitability-based valuations. In such cases, valuing the business based on its net assets, representing the value realized in a liquidation scenario, becomes more appropriate. The appraised value of the liquor license is then added to other assets like inventory and equipment and any other assets to be assumed by a buyer. Buyers would then seek to improve the business in order to realize the value of the newly acquired assets.

Another instance requiring a separate liquor license appraisal is when a business owns a liquor license but does not serve alcohol. Although uncommon, consider a restaurant with a liquor license but, for whatever reason, has not served alcohol for several years. In such cases, the cash flows would derive solely from food and non-alcoholic beverage sales, failing to capture the value of the liquor license. Here, the liquor license becomes an excess asset requiring a separate appraisal from the core operations of the restaurant. However, if the business were being valued using projections that include alcohol sales, then the projected cash flows from the liquor license would inherently value the license, eliminating the need for a separate appraisal.

Other examples of businesses where intangible assets play a crucial role in their valuation may include technology companies with valuable patents, healthcare organizations with valuable intellectual property, or service businesses with valuable brand recognition.

At Withum, we provide a comprehensive range of SBA-compliant valuation services, including liquor license appraisal. We strongly advise lenders to consult qualified appraisers to determine the necessity of such appraisals. Our lender clients can benefit from our complimentary review process, helping them evaluate deal feasibility and the scope of valuation engagements.

Author: Tim Gbur | [email protected]