Risk-Free Rate

The annualised rate of return at which the net present value of all cash flows from an investment equals zero. IRR is the standard performance metric for private equity and venture capital funds, allowing comparison across investments with different holding periods and cash flow profiles.

A discount rate that incorporates a premium reflecting the specific risks associated with a particular asset, cash flow stream, or investment. In intangible asset valuations, risk-adjusted discount rates are typically higher than the weighted average cost of capital to reflect the greater uncertainty inherent in intangible asset cash flows compared to tangible assets.

The rate at which a company's existing customers cease doing business with it over a given period, typically expressed as an annual percentage. Customer attrition rate is a critical input to the valuation of customer relationship intangible assets under both the multi-period excess earnings method and the distributor method.

The minimum rate of return that a fund must achieve before the general partner becomes entitled to carried interest, or the minimum acceptable return for an investment decision. Hurdle rates are typically set between 6% and 8% in PE/VC fund structures and serve as a performance benchmark that aligns manager and investor incentives.

The total fee charged to a merchant for processing a payment card transaction, expressed as a percentage of the transaction value plus a fixed per-transaction fee. The MDR comprises three components: the interchange fee (paid to the issuing bank), the card network assessment fee (paid to Visa/Mastercard), and the acquirer's markup.

A formal written assessment, typically prepared by an independent investment bank or valuation firm, evaluating whether the financial terms of a proposed transaction are fair to a company's shareholders from a financial point of view. Fairness opinions are standard practice in M&A transactions and are relied upon by boards of directors to discharge their fiduciary duties.

An additional return demanded by investors for holding the equity of smaller companies, reflecting the empirically observed tendency for small-capitalisation stocks to earn higher returns than predicted by the Capital Asset Pricing Model alone. Size premiums are commonly sourced from the Duff & Phelps (now Kroll) Cost of Capital Navigator and are added to the cost of equity in the build-up method or as a modification to CAPM.

A decline in the expected rate of return on an asset class or investment, typically driven by increased demand, lower interest rates, or excess capital supply. Yield compression in private markets can inflate the implied valuations of intangible-heavy businesses, requiring investors to scrutinise whether premium multiples are supported by genuine intangible asset quality.

What is the weighted average cost of capital (WACC)?

WACC is the average cost of all capital sources (debt and equity) a company uses, weighted by their proportions — it is the minimum return the company should generate to satisfy all investors.

How do you select the appropriate discount rate for intangible asset valuations?

Discount rates for intangible assets should reflect the asset-specific risk profile, typically ranging from WACC for lower-risk assets like customer relationships to WACC plus a premium for higher-risk assets like in-process R&D.

What discount rate should I use for intangible asset valuation?

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.

What is obsolescence risk and why does it matter in technology valuation?

Obsolescence risk is the danger that technology becomes outdated or superseded, reducing its useful life and economic value — higher for proprietary tech, lower for platforms.