Greenfield Method explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The greenfield method values an intangible on the assumption that it is the only asset in the business, subtracting the replacement cost of every other asset that must be created, leased or acquired instead of a contributory asset charge. The distributor method is a MEEM variation for customer-based intangibles where MEEM has already been used on a more significant asset.
The greenfield method
The basic assumption is that the intangible asset being valued is the only asset, with all other tangible or intangible assets being created, leased or acquired.
This is the structural difference from MEEM. In MEEM you own the supporting assets and deduct a rent on them. In greenfield you own nothing but the subject intangible, so you deduct the cost of getting everything else — "instead of the contributory asset charge generally deducted from the cash flows, a valuer is required to subtract replacement cost of the asset that is required to be built or bought."
That makes greenfield the right method where the intangible is genuinely the licence to operate a business that could be built from scratch around it — which is why the material says it is usually used to value franchise agreements and certain licences.
The five steps
- Prepare cash flow projections on the premise that the intangible is the only asset in the business.
- Project the related revenues, expenses, working capital and capital.
- Project the amount and timing of expenditure relating to the acquisition, creation or rental of other assets required by the intangible asset.
- Compute the present value of the net cash flows using an appropriate discount rate.
- Add a tax amortisation benefit where appropriate.
Step 3 is where the method's discipline lies. It requires not just the cost of the other assets but the timing — a business built around a licence does not acquire everything on day one, and the ramp-up period is part of what the licence is worth.
The distributor method
The distributor method is a variation of MEEM, adopted for the valuation of customer-based intangible assets when MEEM is applied to value another intangible considered to be more significant.
Its fundamental assumption: cash flows of each segment of a particular business are expected to generate profits.
Why it exists
MEEM can only be applied to one intangible in a business, because it treats every other asset as contributory. If MEEM has been used to value, say, technology, the customer relationships cannot then be valued by MEEM as well — the two computations would each assume the other is a supporting asset, and the total would exceed the enterprise's earnings.
The distributor method solves it by valuing the customer relationships as though the customer-facing activity were a distribution business, earning a distributor's margin rather than the whole enterprise's excess earnings.
The six steps
- Prepare revenue and expense projections of existing customer relationships, along with relevant attrition.
- Determine profit margins of distributors comparable to the subject business and apply them to the projected cash flows.
- Determine the support of distributor contributory assets — working capital, fixed assets, workforce and so on.
- Determine excess earnings after considering the contributory asset charges.
- Compute the present value of cash flows using an appropriate discount rate.
- Calculate the tax amortisation benefit if appropriate and applicable, and add it.
Attrition — the input that decides the answer
Step 1 names attrition explicitly. Customer-based intangibles are valued over the life of the existing relationships, and the attrition rate determines how long that is. An attrition assumption taken from a general industry figure rather than from the entity's own customer data is the most common weakness in a distributor-method valuation, and it is the first thing a reviewer tests.
Choosing between the methods
| Situation | Method |
|---|---|
| The primary income-generating intangible in a business | MEEM |
| A second, customer-based intangible where MEEM is used on a more significant asset | Distributor method |
| A franchise agreement or licence around which a business could be built | Greenfield |
| An asset that is licensed in the market, so a royalty rate is observable | Relief from royalty |
| An asset that protects existing cash flows rather than generating a stream | With-and-without |
Compliance checklist
- Use greenfield where the intangible is the business opportunity — franchises and licences.
- In greenfield, project the amount and timing of other-asset expenditure, not just the amount.
- Do not deduct both a contributory asset charge and a replacement cost.
- Use the distributor method for a second customer-based intangible, not MEEM again.
- Derive attrition from the entity's own customer data where possible.
- Benchmark distributor margins to genuinely comparable distribution businesses.
Common mistakes
- Applying MEEM to two intangibles in the same business.
- Using greenfield where supporting assets already exist and are owned.
- Generic attrition assumptions in the distributor method.
- Enterprise margins instead of distributor margins.
- Ignoring the timing of replacement asset expenditure.