How to Value Customer Contracts

Revenue/Revenue – represents an estimate of the percentage of existing customers that are expected to change each year. For example, 10% means that 10% of next year`s sales will not return from existing customer relationships for existing products, or in other words, in 10 years, all customer relationships will be replaced by new customer relationships at the time of purchase. Assessing Client Relationships Three key attributes are important to account for the value of intangible assets related to clients: Tax credits for past losses: The IRS allows certain losses to be carried forward or carried forward. If a company has losses, these can be carried forward over a number of years to offset the profits, which translates into tax savings. Expected tax savings can often be estimated, resulting in value to this asset. In particular, fair value is defined from the point of view of market participants and not from the point of view of a particular party. Accordingly, the valuation of intangible assets related to customers should be based on the assumptions of market participants. For leases where the acquired lessor is a hire purchase agreement or a direct finance lease, the purchaser measures its net investment in the lease as the sum of the following two factors (which corresponds to the fair value of the underlying asset at the time of acquisition): customer relations are the most important individual asset class of companies. On average, 18% of the company`s value is transferable to the customer relationship. After identifying the potential revenues attributable to existing customers at the time of the evaluation, valuation experts estimate the profits based on the expected profitability of the company. It is important to consider only those operating costs that are relevant to the existing customer base from the perspective of market participants. For example, marketing costs that should be required to find new customers and business-specific cost synergies are not relevant to predicting revenue for existing customers. MPEEM is the estimate of the cash flow attributable to a particular asset.

Cash flows are discounted to this day to give an indication of fair value. The most common starting point for estimating future cash flows is forward-looking financial information prepared by the management of the company in question (or in close consultation with). Trade name fees – Trade names can be assessed using a reference revenue stream from a branded product with trade names. Revenues and growth rates should only reflect the synergies of “market players”, not synergies that are specific only to Acquirer Co. The fixed royalty trade name should be the estimated rate that would be required by a 3rd party to use the trade name in question. Contracts: Some contracts, such as employment, affiliation, advertising, or purchase contracts, may be treated as intangible assets because they add value to a business. For example, a long-term lease at below-market prices can be a huge saving in public costs. Or, if a business is sold, the president of the selling company can sign a contract of stay for a certain period of time. This contract is valuable because it saves the cost of replacing the president with a new leader who should learn the trade and take the time to become as efficient. Other types of value contracts may include subscription contracts (for example.B. a cable company`s revenues are largely based on subscriptions) or long-term service contracts sold by the company. Mercer Capital has evaluated client-related assets to the satisfaction of its clients and their auditors in various sectors.

Please contact us to find out how we can help you with acquisition accounting or impairment testing. As mentioned earlier, client-related assets gain value in a limited amount of time, as the number of clients making repeated transactions is expected to decrease over time. Good estimates of expected revenue can be obtained through statistical analysis of historical customer sales and revenue growth rates. Where historical client data of sufficient quality is not available, it may be necessary to rely on management estimates or a review of industry characteristics to establish client turnover rates. The notice discusses various methods of assessing customer relationships, including the multi-period excess earnings method (MEEM or MEEM), the distributor method, the with and without method, and the cost savings method. In addition, the notice addresses crucial issues such as calculating turnover rate and useful life, pre-existing relationships, and customer overlap. In the annex, the opinion offers various case studies with companies from different sectors. Other essential documents related to customer reviews include: Customer relationships are an important intangible asset for companies operating in many industries.

Companies devote significant human and financial resources to developing, maintaining and improving customer relationships. In some cases, supply or customer contracts give rise to identifiable intangible assets. However, in a broader sense, customer-related intangible assets include information obtained from repeated transactions with or without underlying contracts. Companies can rent, sell, buy or otherwise exchange this information, which is usually organized in the form of customer lists. Technical libraries and other specialized information repositories: Many libraries contain almost irreplaceable material and can be extremely difficult to create. These assets are often valued based on the cost of restoring them, minus losses due to obsolescence. Present value of cash flows after tax – calculated as follows: Valuation of customer relationships Proprietary lists: Many types of lists, e.B. customer or subscription lists, are often compiled, bought or sold for internal use.

Lists are especially useful when they represent ongoing business relationships. For example, if a newspaper receives 80% of its advertising revenue from companies on a customer list, that list is an important business tool. Values can be based on the replacement cost of a list or the repeated sales generated. The cash flow attributable to the client`s asset is isolated from the estimated result by measuring the non-contributory expenses for the other assets of the company concerned. As mentioned earlier, a number of other assets need to be present for companies to derive value from customer-related assets. Contributory fees represent an economic rent that corresponds to the returns and returns on assets needed to produce goods or services marketed to customers. Revenue growth on an independent basis, i.e. without synergies specific to the acquirer Co.

– this involves evaluating the existing field service of the acquired company. This could be based on revenue projections made by the acquired company during the sale or on new estimates, but synergies should not be taken into account (synergies are included in the remaining amount of goodwill). This means growth in existing and new customer relationships for existing and new products, but without new customer relationships or new products from the acquirer`s customer/product portfolio. Valuation consulting is a must for all professionals involved in valuing client-related assets. The full text can be read or downloaded here. In June 2012, the Appraisal Foundation`s Valuation Practices Council released a draft discussion of a document entitled “Valuing Client Assets.” The draft prepared by the Client Assets Working Group contains best practice guidelines for the valuation of client-related intangible assets. A subsequent draft was published in December 2013. A final version of the document is still pending.

This article, which is based in part on these documents, examines the attributes of intangible assets related to clients and their valuation. The final value – also called residual value – is the value of the business that remains after year 15, customer relationships and products should continue to generate value indefinitely. Patents and patent applications: The value of a patent depends on its economic and legal lifespan. The value of a patent application depends on the strength of its claims. The present value factor is then calculated as follows: 1 / ((1 + i%)^n), i is the discount factor, 14.0% and n is year 1, year 2, ….. Year 16, i.e. year 1 = 1 / ((1,14)^1) = 0.8772 and year 16 = 1 / ((1,14^16) = 0.1229. As a small business owner, you probably have questions about how to value your business` intangible assets. Let yourself be supported today by an experienced lawyer in business and commercial law. In addition, ASC 360 Property, Plant and Equipment sets out procedures for verifying the impairment of long-lived assets (including intangible assets related to customers) held and used or assets held for sale or disposal. Year 1: Amortization of the present value of cash flows after tax x Present value factor x First year sub-factor x Income tax expense % or valuation of customer relationships Depreciation of inventory – represents the depreciation of the accounting of purchases on inventories, if any. The amount must be deducted hereto in order to avoid an overvaluation of the Client`s intangible assets.

It is fully deducted in year 1. The need to value customer-related intangible assets for financial reporting purposes can arise primarily in two contexts: goodwill: Goodwill is based on your company`s reputation and relationships with customers, suppliers and the community, as well as its involvement in trade-related activities. .