The Handbook of Business Valuation and Intellectual Property Analysis

Edited by Robert F. Reilly and Robert P. Schweihs

McGraw-Hill, 2004; ISBN: 0071429670; 600 pages; $99.95 (hardcover)

Reviewed by Martin J. Lieberman

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This new work’s main contribution is its recognition of the importance of intangible assets in the information age. It addresses the enormous complexities associated with measuring the value of these assets in a practical context. This work is truly for the experienced professional; however, the novice can derive insight into this area as well.

There has been an explosion of intangible assets, which now make up the majority of many companies’ asset base. One indicator of the value of intangible assets today is the relationship between book value and trading prices for public company securities. Prior to 1980, book value tracked security prices. Today, security prices are, to a large degree, very much in excess of book value. The reason is that accounting rules do not permit the recording of intangible asset values unless they have been purchased. The marketplace, however, recognizes the value of intangible assets, and this is reflected in security prices.

More than half the book is devoted to valuation topics other than intangible assets. The book is divided into six parts. Part I explores traditional valuation issues, including discussions of the elusive equity risk premium, minority interest and marketability discounts, built-in gains taxes, and S corporation valuations. Part II provides valuation methodologies for certain specialized industries, such as health care. Fairness opinions and the now-popular family limited liability companies are also discussed. Part III has an excellent chapter on identifying value drivers as an important means of arriving at more “correct” valuation conclusions. The exercise of identifying value drivers and quantifying their impact on company value contributes enormously to achieving credibility in one’s reports. The practical application to real-life valuation assignments, backed by theoretical underpinnings, is the hallmark of these chapters, as well as of the entire book. The chapter on quantifying economic damages is one that I found particularly useful.

Parts IV, V, and VI are devoted to intellectual property valuation issues, methodologies, and case studies, from the basic to the arcane. Part IV covers intellectual property valuation approaches, methods, and discount rates. Part V focuses on the estimation of transfer pricing, which is useful in nailing down more than just transfer prices for such cases. It also provides a methodology for constructing values in other types of assignments, using acceptable transfer pricing income tax methods as justification. Part VI describes research techniques for economic damage issues, and offers a case study. In most valuation assignments, finding data to support a position is always challenging; finding inexpensive data is even more challenging. The book provides resources for hard-to-find databases such as royalty rates.

In general, the book is a must for the serious practitioner wanting to stay on the cutting edge. Certain controversial issues are addressed and clarified, and there are enlightening discussions of advanced topics. The book is intended to tell the reader what is happening now in the evolving field of business and intangible asset valuation. Although it was published in 2004, certain not-so-recent changes in the law are not reflected in the text. For example, the chapter by Pamela Garland refers to patent life of 20 years from issuance, but the law adopted in 2003 grants patent life for 20 years from application date. Therefore, caution is advised: The moving target of current law and thinking cannot be solidly cast in any work of this size and scope.

Nonetheless, The Handbook of Business Valuation and Intellectual Property Analysis is a welcome addition to my library. I recommend it to any serious valuation professional, as well as to those just entering the field.