You may not be able to touch these assets and they may not even have a monetary value attached to them but certain things like goodwill, patents, copyrights, and intellectual properties definitely help in boosting the price tag of your business. By hearing the word ‘assets’, most people think of physical items like real estate, cash, property etc. Intangible asset is a kind of property that is quite different from traditional assets. They are not in physical form, but play a very important role in enhancing your business value.
Most business owners consult business analysts or advisers rather than valuing intangible assets on their own; there are various ways in which you can highlight the value of your intangible assets as you either prepare for an acquisition or want to increase the company’s value in the capital market. [Tip: here’s a course to help you become a business analyst!]
What are Intangible Assets?
Intangible assets are the long-term assets of the company that do not have any physical existence. Some of the popular assets that come under intangible assets include copyrights, goodwill, non-compete agreements, patents etc. Intangible assets are acquired in small business combinations or are developed internally. They are one of the hardest items that you can put value to and are recorded on the balance sheet if purchased. They are ignored if generated internally. If their value is viewed to be impaired, then their value is reviewed annually. When valuing a company or small business for sale, intangible assets hardly have any relation to the economic value of the company. Learn about business finance and valuing your assets in this course.
Examples of Intangible Assets
Intangible assets are recognized as a part of acquisition, where the buyer is allowed to assign a part of the purchase price of the intangible assets. Examples of intangible assets include:
A trademark is any symbol, name, mark, word or letter that is adopted and used by the business in order to differentiate it in the market. It visually sets a company or its products apart from its competitors in the market to gain market share. Trademark comes under the category of intellectual properties that help the company to get distinguished from other similar companies in the market. For example, the golden arch of McDonalds is the best example of a symbol trade mark. Similarly, Geico’s talking gecko is an example of a trademark character. Take this course to learn the essentials about trademarks, patents, and copyright laws.
Goodwill is recognized when a company acquires another business. It constitutes the cost paid by the purchasing company to the other over the fair value of identifiable assets. In short, it is created when a company acquires the other company for a higher price than the fair market price of the identifiable assets as well as liabilities of the company.
Let’s say for example, assume a company ABC wants to acquire company XYZ. Now, ABC purchases all the outstanding stock of XYZ for $20 million. The fair value of the net assets of XYZ equaled $15 million at the time of purchase. The difference between the amount paid by ABC and the fair value of assets of XYZ is the ‘goodwill’, which amounts to $5 million.
Copyrights grant a company the complete rights to design, manufacture and sell its products/services. A copyright is a protection provided to any business that creates original works. With a registered copyright, you can claim actual damages, statutory damages and perform a variety of legal activities.
The example of copyright works in terms of small business include database, marketing or business plan, annual reports, architectural plans, business proposals, letter & emails, technical specification of the products & services, etc. If you create intellectual works related to your business, you will automatically hold copyrights on them. Learn how to copyright your product and stay safe with this course.
Patents grant your business the required control over the specific product or design. There are 3 types of patents – plant patents, utility patents, and design patents that you can apply based on the nature of your business. If you have an abstract business idea, then you can apply for a utility patent. A utility patent may be granted to either a process or a machine. You can hire a patent lawyer to file patents for you, or you can learn how to file your own patents with this course.
- Trade secrets
A trade secret is a formula, practice, design, process, instrument, technique or pattern that brings great success in the business, but is not generally known to others or reasonably ascertainable. Your business can get a great economic advantage over the competitors with the trade secret. A formula of sports drink, recipe, product information, pricing information, business relationships etc. are some good examples of a trade secret. A trade secret is like a do-it-yourself kind of protection; all you need to do is simply keep the information.
The success formula of Coca-Cola is the best example of trade secrets, wherein the general public still remains unaware of the recipe to the company’s success!
The skills and knowledge of employees also come under intangible assets, as they play a very important role in the development of your business.
How Intangible Assets Affect the Value of Your Business
Customer awareness and reputation of the business in the market place are the key ingredients to the success of any business, regardless of its size. The value of intangible assets such as intellectual property, knowledge, relationships, etc. are a greater proportion of most of the businesses nowadays than the value of intangible assets such as equipment, machinery, technology, trademarks, computer software etc. Learn more about how to value and manage intangible assets with this course on financial modelling. The creation of intangible assets is crucial for the long-term success of a business. Most of the business owners do not have adequate understanding of how their company’s reputation impacts the value of their business. You can estimate the value of the asset through an in-depth analysis. In valuing your brand awareness, the thumb rule to remember is 80/20, which means 20 per cent of the customers will produce 80 per cent of your company’s profits.
The customer base is another intangible asset that has a huge impact on your business value. Categorizing the customers on the basis of their characteristics is one of the best methods to value your customer base. A useful method to build your brand reputation with your customer is to consider customer awareness, quality perception of the brand and loyalty as customer loyalty and brand awareness are two important components that can enhance the value of your business. This course can help you build a strong brand and manage it well. The value of your business can be realized through increased earnings that are received consistently over a period of time; you must realize this value and convey it to the potential buyers. The better you manage the intangible assets, the higher premium you will receive upon selling your business.
Management of Intangible Assets and Resources
An increasing amount of interest and concern has been given to manage intangible assets of businesses over the years. Most of the business owners and entrepreneurs agree that the influence of intangible assets has a very big hand in the success of their companies. It is pretty easy to take inventory of tangible assets. You have cash flow, property, equipment, etc. that can be summarized under a single number. But, do you think that this number will reflect the true value of your business? The answer is probably ‘NO’. You can place a higher value on the business based on the number you get from intangible assets. As said above, intangible assets are the unseen elements that could be far more worthy than the physical assets of your business. They matter a lot as they give a complete perspective of your business, and may eventually lead to a high purchase pay-out in case of small companies. To manage common intangibles in a better way, you can adopt the below discussed methods:
- Big data – The data that your business collects is very important and is one of the valuable intangible assets. Most of the businesses go into trouble due to lack of adequate data. Your willingness to examine and analyse the data can bring great success to your business.
- Customer relationship – Miracles happen, when you take care of your customers. You will be able to develop loyal customers who may turn into brand advocates to promote your business. Moreover, a good relationship with your customer will provide better data for building a successful portfolio.
- Visualize the big picture – Focusing on only the bottom line of the company may lead to the overlooking of several other important things. If you appreciate the intangibles as unique elements, you will be able to successfully stand out in the market against your competitors.
Valuing intangible assets proves to be a complex task as it needs a proper understanding of various methodologies and approaches; therefore, often businesses use the services of CPA valuation analysts to perform valuation of their intangible assets. While CPA analysts definitely have a thorough knowledge on the subject and can be very resourceful, at the same time it’s important for you as a business owner or manager to understand the importance of intangible assets. So, no matter in which industry you operate in, identify the intangibles of your business and get started on measuring and evaluating them for greater business value.