The change in the economic and political situation in the country led to the leaving of a large number of foreign companies from the Russian market. Someone leaves the Russian Federation completely and irrevocably, closing the business. Someone is trying to sell assets and find independent Russian investors. The rest of the companies are restructuring their business, not in a hurry to leave completely, transferring assets to nominal Russian or other holders, or temporarily freezing operating activities.
Thus, when selling shares, shares in the share capital, real estate transactions, where permission from a Government commission is required, it becomes necessary to value a business or assets. The requirements of the Government Commission provide for a valuation of the transferred asset and an examination of the report in a self-regulatory organization of appraisers. If the transaction does not require the approval of a Government Commission, in the vast majority of cases it is advisable to conduct a valuation for such transactions in order to reduce the risks of its contestation, tax and other risks.
Chewing marmalade
Photo: freepik.ru
Since 2022, Valrus has conducted a large number of valuations of both businesses and assets owned by foreign investors. We will talk about one such case.
The exclusive rights to trademarks of the products of the international confectionery concern were subject to valuation. Trademarks are used to name and brand chewing marmalade. The valuation products are the one of the market leaders – it can be found in almost every outlet, it is known to most adults and children. Trademarks were localized brands used for the production and distribution of products in the territory of the Russian Federation. The international corporation transferred a package of trademarks to its subsidiary Russian company as part of the restructuring of its activities in the Russian Federation.
Since the transaction could be considered as an interested party transaction and was subject to tax control within the framework of transfer pricing, tax lawyers were asked to value the transferred assets in an independent valuation company Valrus.
The used valuation methodology
Photo: freepik.ru
To value trademarks, we used a combination of income-based and comparative approaches. An analysis of the profitability of production and sale of products under these trademarks was carried out, an analysis of royalty rates under license agreements for comparable goods was carried out, taking into account adjustments, the royalty rate for the valued brands was determined, cash flow was calculated using the royalty exemption method, as well as the profit advantage method.
One of the significant points in the valuation was the division of the total royalty flows associated with product branding between different trademarks. After all, in addition to branding with localized trademarks, products were also branded with trademarks used in international markets. The allocation of the share of royalties attributable to Russian names was carried out in proportion to the share of these images in the total area of product branding on its packaging.
The client carried out scrupulous work on calculating these ratios for products of each name from the assortment list, and we used sales reports with appropriate detail. That is, not only gross sales data were used, but also sales data, detailed to specific assortment items. Because the shares of localized branding and, accordingly, the amount of royalties attributable to the valued trademark in products with different packaging differed.
The result
The valuation results differed slightly from the client's expectations, but after explaining our methodology, approach and the main assumptions used for the calculation, the client agreed with the presented conclusions and was completely satisfied with the valuation result. We really hope that our valuation will help the company to continue working in the Russian market, and we will continue to delight our children with delicious marmalade bears and snakes.