Cracking the Code: CACs in Customer Valuation (MPEEM)

Understand how Return ON and Return OF assets help isolate value in intangible asset valuation.

What Are CACs?

Contributory Asset Charges (CACs) = Economic charges for using supporting assets (like brand, workforce, equipment) that help generate revenue from the main intangible asset (e.g., customer relationships).

🎯 Purpose: To ensure that only net cash flows attributable to the subject intangible asset are valued.

Return ON vs Return OF – What's the Difference?

📈 Return ON Asset = Profit an investor expects for deploying capital (like interest/dividend).

📉 Return OF Asset = Recovery of the original capital over time (like depreciation).

🔄 Fixed assets require both. Intangibles like brand may only need Return ON.

Common Types of Contributory Assets & CAC Treatments

• Working Capital → Return ON only (e.g., 6%)
• Fixed Assets → Return ON + Return OF (e.g., 10%)
• Assembled Workforce → Return ON (based on replacement cost)
• IP, Brands → Royalty method / Profit Split (no CAC to avoid double-counting)

Important: Method must align with how asset was valued

— CAC or royalty, not both.

Key Valuation Watchouts

⚠Avoid double-counting CACs (e.g., don't apply CAC on brand if you've already deducted a royalty).

• Align with market participant assumptions.
• Allocate CACs proportionally when multiple intangibles are present.
• Recalculate annually — asset contributions change over time.

Why It Matters

✅ Proper CAC application helps prevent over/undervaluing customer relationships.

📊 Fair allocation of value = Defensible valuation under M&A and audit scrutiny.

💬 Save this if you're a valuation professional or FP&A lead working on intangibles!