After exploring how to legally protect know-how and the challenges of its accounting recognition, the central question arises: what is it actually worth? Financial valuation is a key exercise for any transaction, fundraising effort, or strategic management decision.
Financial expertise relies on three main approaches to estimate the value of an intangible asset, generally favoring a triangulation of results to enhance robustness.
1. The Three Main Valuation Approaches
1. Cost approach: This method evaluates know-how based on what it costs to create or what it would cost to replace. Its main limitation is that it completely ignores future profitability and the competitive advantage generated. At best, it serves as a “floor value.”
2. Market approach: This consists of comparing the asset with similar transactions, such as licensing deals. Although pragmatic, it often faces a lack of public data and the unique nature of each piece of know-how, making comparisons subjective and unreliable.
3. Income approach: Considered the reference method, it focuses on the asset’s ability to generate future economic benefits. Two methods stand out:
- Relief from Royalty method: Particularly well-suited to know-how, it estimates value by calculating the royalties the company “saves” by owning the asset rather than paying a license fee to a third party. The value corresponds to the discounted sum of these future royalties.
- Excess Earnings method: This aims to isolate the portion of earnings directly attributable to the know-how by subtracting the “normal” return on other assets, whether tangible or financial. It provides a tangible demonstration of the financial contribution of intangible assets.
2. Strategic and Tax Implications of Valuation
Valuing know-how is not merely a theoretical exercise; it has very concrete implications:
- In mergers and acquisitions (M&A): A rigorous valuation is essential during due diligence to identify the target’s value drivers and justify the purchase price. It is also mandatory after acquisition for purchase price allocation (PPA) on the balance sheet.
- In litigation: It allows for estimating financial damages in cases of infringement or unfair competition.
- From a tax perspective: Acquired and identifiable know-how may be amortized for tax purposes, generally over five years, generating tax savings. In addition, a temporary tax measure, applicable to acquisitions between 2022 and 2025, allows the tax deduction of goodwill amortization, which includes non-separable know-how. This tax advantage can increase the company’s valuation in the event of a sale.
In summary, valuing know-how is a complex process that transforms an abstract concept into a powerful financial and strategic lever. It rests on two pillars: robust legal protection and rigorous financial analysis of future revenue streams. Given the complexity of legal, accounting, and tax frameworks, relying on experts is essential to secure and maximize the value of this intangible asset.
