What discount rate should I use for intangible asset valuation?
Short Answer
Discount rates for intangible assets typically range from 10-25%, reflecting higher risk than the overall business WACC. Customer relationships sit at the lower end, while in-process R&D commands the highest rates.
Full Explanation
The discount rate for an intangible asset should reflect the risk profile of the cash flows specific to that asset, not the overall company WACC. The standard approach starts with the company's WACC and adjusts upward based on the asset's relative risk. The Weighted Average Return on Assets (WARA) framework ensures that the weighted average of all asset-specific discount rates reconciles back to the company's overall WACC. Typical ranges by asset type: customer relationships (WACC + 1-3%), brand names (WACC + 2-4%), developed technology (WACC + 3-6%), in-process R&D (WACC + 5-10%). These premiums reflect factors like customer concentration risk, technology obsolescence, competitive intensity, and development uncertainty. In practice, observable inputs from market transactions and the IRR implied by comparable deals can help calibrate the rates. Getting the discount rate right is critical — a 2% change can shift asset values by 15-25% depending on the forecast horizon.
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