Valuation Methods — Lesson 9 of 10
Theory without practice is academic. This lesson applies the valuation methods covered in Lessons 2 through 8 to five different intangible assets, each valued using the method best suited to its characteristics. Each example includes the full calculation, the key assumptions, and the judgement points where professional expertise matters most.
The five examples use a single acquisition scenario — the purchase of Meridian Manufacturing Ltd for $250 million — to demonstrate how multiple methods work together in a purchase price allocation.
In a typical PPA, five or more intangible assets are identified and valued using different methods. The MPEEM is applied last (to the primary asset), after all other intangible assets have been valued using RFR, W&W, market, or cost approaches. The aggregate of all asset values, including goodwill, must equal the purchase price.
The Acquisition: Meridian Manufacturing Ltd
Meridian Manufacturing is a UK-based precision engineering company acquired by an industrial conglomerate for $250 million. The PPA identifies the following intangible assets:
Meridian Manufacturing — Identified Intangible Assets
| Asset | Method | Lesson Reference |
|---|---|---|
| Patent portfolio (12 granted patents) | RFR | Example 1 |
| Customer relationships (185 accounts) | MPEEM | Example 2 |
| Proprietary manufacturing technology | W&W | Example 3 |
| Meridian brand | RFR + Market | Example 4 |
| Assembled workforce (420 employees) | Cost | Example 5 |
| Net tangible assets | Book value | N/A |
Example 1: Patent Portfolio — Relief from Royalty
Meridian holds 12 granted patents covering precision machining processes. The patents have a weighted average remaining life of 8 years. Products covered by the patents generate annual revenue of $85 million.
Royalty rate selection: Comparable licensing agreements for industrial manufacturing patents (sourced from RoyaltyStat) show rates of 3-5% of net sales. Given Meridian's patents cover core manufacturing processes with limited substitutes, the valuer selects 4.5%.
Patent Portfolio RFR Calculation ($M)
| Year | Revenue | Royalty (4.5%) | Tax (25%) | After-Tax | PV (13%) |
|---|---|---|---|---|---|
| 1 | 85.0 | 3.83 | 0.96 | 2.87 | 2.54 |
| 2 | 87.6 | 3.94 | 0.99 | 2.96 | 2.32 |
| 3 | 89.3 | 4.02 | 1.01 | 3.02 | 2.09 |
| 4 | 90.1 | 4.05 | 1.01 | 3.04 | 1.86 |
| 5 | 89.2 | 4.01 | 1.00 | 3.01 | 1.63 |
| 6 | 86.5 | 3.89 | 0.97 | 2.92 | 1.40 |
| 7 | 82.0 | 3.69 | 0.92 | 2.77 | 1.17 |
| 8 | 76.0 | 3.42 | 0.86 | 2.57 | 0.96 |
| Total | 13.97 |
Pre-TAB value: $14.0 million. With TAB (10.5% uplift): $15.5 million.
Revenue declines in years 5-8 as certain patents approach expiry and competitors develop alternative processes. The discount rate of 13% reflects WACC (10%) plus a 3% premium for patent-specific risk (enforceability, design-around potential).
Example 2: Customer Relationships — MPEEM
Meridian has 185 active customer accounts generating $120 million in annual revenue. Historical analysis shows a 7% annual customer attrition rate. Customer relationships are identified as the primary intangible asset — the principal driver of Meridian's cash flows.