WhiskyFRS102 IP Valuation Case Study

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Client

An established membership organisation, aimed at keen whisky drinkers, had undergone a change in ownership and required an IP valuation of goodwill and intangibles to support a purchase price allocation (“PPA”) for accounting purposes.

Background

The Company, previously owned by an iconic whisky producer, had built an international membership of 30,000 over the last 30 years. It sourced whisky from various distilleries, blended and bottled it for events and for sale to its membership using its premium brand and reputation. A change in strategic direction resulted in the Company being sold to a group of private investors.

Assignment

The Company needed to account for the acquired IP assets in its year-end financial statements. The assignment was referred to us by the Company’s accountant who recognised that an IP specialist was needed to perform the valuation of key intangibles as part of a PPA, in accordance with FRS 102. An independent IP specialist who could help the Company identify all the IP assets classes, value them and then report in detail on the value and the rigorous methodologies adopted, would enable them, as conflicted auditors, to rely on the PPA in the course of the year-end audit.

Features of our solution

  • Identification and valuation of key IP assets at the date of acquisition, split by asset class
  • Agreement on each IP assets contribution to revenue and profitability
  • Assessment of the estimated economic useful lives (“EUL”) of each IP asset
  • A robust valuation report, fit to withstand auditor scrutiny
  • A valuation range, provided for each IP asset, underpinned by reliable assumptions, methodology and cross-checks

Documents used

  • Seller’s Information Memorandum
  • Historic audited financial statements
  • Detailed financial forecasts and supporting assumptions
  • Information directly related to the key IP assets, including a Sale and Purchase Agreement, licence agreements and trade mark registrations

Process

Metis Partners performed initial desk-based research on the Company and the sector in which it operates. We requested and reviewed client documents as part of our initial diligence to confirm the ownership of key IP assets and to assess how these had been leveraged and commercialised to date. We then conducted an Information Discovery Call with the Company’s management to gain a fuller understanding of the IP assets vesting in the business at the date of acquisition, the Company’s strategy for monetising these, and the key assumptions underpinning the financial forecasts on which the valuation was based. We performed detailed analysis and benchmarking, with a final Metis Partners Full IP Valuation Report being delivered to the client within 4 weeks of the assignment “kick-off”.

IP Valuation: our approach

Valuation methodology

We identified key IP asset classes using our proprietary Metisology®. Our initial analysis indicated that the IP assets were driving the Company’s revenues at the date of acquisition and so selected an income approach, specifically the relief from royalty method, to value them.

Estimated economic useful lives

We estimated the EUL of each IP asset using our EUL scorecard, which we benchmarked against our sector database.  This enabled us to set a realistic period for related forecast revenues for each IP asset, and of course avoided the Company having to adopt the FRS 102’s presumptive 5-year useful life – an assumption that would have been contrary to the commercial and economic reality of the Company’s IP potential.

IP asset indicator scorecard and analysis

Metis Partners concluded on a suitable royalty rate for each of the Company’s IP assets only after analysing comparable royalty rate agreements from our reliable third party provider, and benchmarking the royalty rates against our own database of IP valuations and IP sales. We utilised our Indicator Scorecards to rate the quality of each IP asset within the Company, including brand & reputation, membership database and a website & domain name. The result was a royalty rate that was entirely specific to the Company’s IP assets.

Accounting for risk

Metis Partners used its proprietary Risk Scorecard to assess the risk that the forecast revenues may not be achieved, taking account of the Company’s track record, the financial position of the Company at the valuation date, the strategy and management team that would be monetising the IP and product/market opportunity that the IP assets supported.

Report

The Metis Partners Full IP Valuation Report was delivered within 4 weeks and provided commentary on all aspects of the Company and its IP assets that influenced our assumptions in arriving at a valuation including:

  • An overview of the pre-acquisition business; its products and services, key customers and suppliers, and its position in the sector
  • An overview of historical financial performance
  • An overview of each IP asset, highlighting indicators of value
  • Details of Metis Partners’ IP valuation approach and methodology
  • A valuation range for the identified IP assets, incorporating a market cross-check

Outcomes

  • The Company was able to recognise the individual IP assets acquired in its consolidated accounts at a reliable value
  • The Company had an independent assessment of the estimated economic useful lives of each IP asset to enable amortisation in future accounting periods
  • The Company avoided a large value being attributable to purchased goodwill, minimising future write offs to profit
  • The auditor had assurance that the IP value stated in the financial statements was arrived at by an IP specialist with rigorous and professional standards
  • The auditor had a detailed report that included relevant calculations and assumptions that were easily audited

During the audit process, our valuation had to withstand third-party and HMRC scrutiny. This assignment, like the other PPAs Metis Partners has performed, resulted in an auditor sign off in respect of the IP allocation within PPA.