How to Adjust Owners Equity for Intangible Assets
Intangible assets encompass items that are owned by a company, but are not physical. Examples include copyrights, patents and mailing lists. There are many methods for valuing intangible assets, depending on the type of company you wish to analyze and the product it produces. The excess profits method values a company by assuming any earnings that are not made as a result of tangible assets are a result of the company's intangible assets.
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Instructions
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Calculate the carrying cost of all tangible assets. These represent anything physical, such as machinery, computers, buildings, inventory and other items. The carrying cost represents the cost in taking out a loan for purchasing such equipment, if this event should theoretically arise. So, if the interest rate of a loan was 8 percent and the total value of the tangible assets was $100,000, the carrying cost of the tangible assets would equal $8,000.
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Subtract the carrying cost of the tangible assets from the total earnings of the company to arrive at the excess earnings of the company. So, if the company earned a total of $200,000 for a given year, subtracting $8,000 from $200,000 gives an excess earnings of $192,000.
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Multiply the excess earnings by a multiplier. The multiplier takes the value of 1 to 6, with 1 used for the riskiest businesses and 6 representing the least risky ones. A financial advisor can be used to help you with this, but if the business is of average risk, use a multiplier of 3. So, multiplying $192,000 by 3 gives a value of $576,000. This is the estimated total value of the business and also the owner's equity after taking into account intangible assets, as the company's value that is not purely caused by tangible assets is calculated.
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