What is a sensitivity analysis in intangible asset valuation?

Full Explanation

Sensitivity analysis is an essential component of any credible intangible asset valuation. It involves systematically varying one or more key assumptions while holding others constant to observe the resulting change in fair value. The most commonly tested variables include: discount rate (a 1% change can shift value by 5-15%), revenue growth rate (particularly for early-stage or high-growth assets), customer attrition rate (critical for customer relationship valuations via MPEEM), royalty rate (the primary driver in Relief from Royalty valuations), useful life (longer life increases present value), and probability of completion (for IPR&D valuations). A well-structured sensitivity analysis presents results in a matrix format showing the range of fair values under different assumption combinations. For example, a customer relationship valued at £8M under base-case assumptions might range from £6.5M to £9.8M when varying attrition rate (12-18%) and discount rate (13-17%). This range communicates the degree of uncertainty to stakeholders and auditors. Sensitivity analysis also helps identify which assumptions warrant the most scrutiny — if value is highly sensitive to the royalty rate but relatively insensitive to growth rate, then supporting the royalty rate selection with robust market data becomes the priority. Auditors expect to see sensitivity analysis in any PPA report, and many will request additional scenarios during their review.

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