Intellectual Property Appraisals are essential for valuing:
● Marketing-related Intangibles o Trademarks & Trade names
o Brand names & Logos
● Goodwill-related Intangibles o General Business Going Concern Value
o Professional Practice Goodwill
o Institutional Goodwill
o Personal Goodwill of a Professional
o Celebrity Goodwill
o Right of Publicity
● Technology-related Intangibles o Websites and Web Properties
o Social Media and SEO
o Process Patents & Patent Applications
o Technical Documentation
(Laboratory Notebooks, Technical Know-how, etc.)
o Trade Secrets
● Computer-related Intangibles o Proprietary Computer Software
o Software Copyrights
o Automated Databases
o Integrated Circuit Masks and Masters
● Engineering-related Intangibles o Industrial Design
o Product Patents
o Trade Secrets
o Engineering Drawings and Schematics
o Blueprints
o Proprietary Documentation
● Customer-related Intangibles o Customer Lists
o Customer Contracts
o Customer Relationships
o Open Purchase Orders
● Contract-related Intangibles o Franchise Rights and Agreements
o License Agreements
o Royalties
o Distribution Networks
o Non-compete Agreements
o Favorable Supplier Contracts
● Human Capital-related Intangibles o Stock Options
o Employment Agreements
o Trained and Assembled Workforce
o Union Contracts
● Location-related Intangibles o Leasehold Interests
o Mineral Exploitation Rights
o Easements, Air rights and Water Rights
● Artistic-related Intangibles o Copyrights and Literary Works
o Engravings
o Maps
o Musical Compositions
These appraisals provide you the opportunity to comply with Deferred Compensation rules (usually Stock Options) under IRC §409 non-taxable compensation:
Deferred compensation (including Stock Options) rules:
• Can be used to attract and retain employees.
• Must meet certain IRS requirements to not be immediately taxable to the employee.
• Is not subject to §409A penalties if the strike price (or exercise price) is equal to, or greater than, the fair market value of the shares on the grant date. [Failure to set an appropriate strike price will subject the stock option recipient (employee) to the penalty provisions of §409A.]
Penalty provisions – provide that the recipient of non-compliant stock options will:
• Be taxed at ordinary income tax rates for the value of the deferred compensation,
• Pay an additional 20% penalty, and
• Be subject to significant late payment penalties.
And, the company may be subject to employee lawsuits for failing to set an appropriate option price.
Relief from penalty – For setting the strike price at or above fair market value, the IRS has provided several methods for complying with the requirements of §409A that create a presumption that the fair market value is reasonable:
• Independent Appraisal Presumption – companies must engage a “qualified appraiser” to value the company’s shares. The valuation provided by the “qualified appraiser” is valid for a period of 12 months unless during that period an event (such as merger or new financing) occurs which has a material effect on the company’s stock value.
• Formula Valuation Presumption – companies that have a binding formula for determining the sale price of stock to other parties, could use a formula-based presumption (such as for a buy-sell agreement between the shareholders) of fair market value, provided the shares may not be sold or transferred in any way other than according to the formula.
• Illiquid Startup Presumption – companies in the startup stage (less than 10 years old) can provide their own valuation, if the company is illiquid, the price of the stock is reasonable, and the company does not have any public stock outstanding. Such a valuation may be performed internally, by a qualified person with significant experience performing similar valuations and must be evidenced by a written report.
Have a question on Business Valuation? Contact Michael Gilburd.
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