What is a WARA reconciliation in intangible valuation?

Full Explanation

WARA stands for the weighted average return on assets. In an intangible valuation, particularly one using the Multi-Period Excess Earnings Method, each class of asset a business relies on, working capital, tangible fixed assets, and the various intangibles, is assigned its own required rate of return reflecting its risk. Riskier, harder-to-realise assets carry higher return requirements than safe, liquid ones. The WARA is the value-weighted average of all those individual returns across the complete asset base. The reconciliation is a discipline check. The WARA should broadly equal the business's overall weighted average cost of capital (WACC), because the returns earned on all the assets together must, by definition, add up to the return on the enterprise as a whole. If the WARA and the WACC diverge materially, something is wrong: a discount rate on one asset may be too high or too low, the asset values may be mis-weighted, or an asset may be missing from the analysis. Valuers therefore iterate the individual rates until the weighted blend reconciles to the enterprise return. This is why the technique is central to setting a defensible discount rate under IVS 210, and it directly underpins the contributory asset charges deducted in the excess-earnings method. For a lender, a clean WARA reconciliation is evidence of rigour. It signals that the intangible has not been valued in isolation with a conveniently low discount rate, but sits within a coherent framework where its return assumption is consistent with the wider business. A credit team reviewing a valuation to a credit standard will expect to see this reconciliation, because an unreconciled, optimistic discount rate is one of the classic ways a valuation can overstate collateral. Conservative lending inputs, a risk-adjusted discount rate and a finite economic life, are more credible when the overall return structure holds together. If you are procuring a valuation to support IP-backed borrowing, ask your valuer to include the WARA reconciliation in the report and to show that the asset returns reconcile to the WACC. Where they do not reconcile, ask what was adjusted and why. Presenting a reconciled analysis to a lender up front reduces back-and-forth in underwriting and strengthens the credibility of the figure you are borrowing against.

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