“Intangible assets” is a phrase that may seem boring, but these are the features that can drive or kill the value of your business. They can mean the difference between getting what you think your business is worth and getting a disappointing offer.
Less obvious to an outsider than fixed assets such as machinery or buildings, intangibles are an asset category that encompasses many of the factors that give a company its edge, or its ability to generate better-than-typical future earnings. Earnings are critical for determining the value of your business. Intangibles include the talent in your staff, the company’s culture and its creative or intellectual property (patents, trademarks, etc.).
Unfortunately, though, business owners often ignore important opportunities to grow their business’s value ahead of an exit, according to Christopher Snider, president of the Exit Planning Institute, which provides education, training and other resources to business owners. That’s because owners either don’t take into account the current value of their intangible assets as they plan to sell or leave their businesses, or they don’t take the needed steps early on to capture and increase that value, he says.
“Most of your business value is built on your intangible assets, but today’s accounting systems are not really designed to give owners feedback on their intangibles,” Snider says. “Most accounting systems that were built for businesses back in the 1950s do a good job of giving the owner feedback on their tangible assets – the hard, physical assets in the business like facilities, machinery and land.”
That’s because wealth in the past was created from physical assets. However, technology has disrupted the entire system of wealth creation. Wealth is created by a company’s ability to create, transfer, assemble, integrate, protect and exploit knowledge assets. And when valuation professionals assign a multiple to a business’s cash flow in order to determine the value, a greater portion of the multiple is typically allocated to intangible assets than to tangible assets, says Snider, who provides training to valuation professionals on measuring intangible assets.
In other words, it is the intangible assets that can move the multiple higher.
Snider says there are four areas of knowledge capital, or intellectual capital, that can exponentially increase a business’s brand value:
Human capital: If all other things are equal, someone would be more likely to pay you more for a company with a talented management team than it would for a team that’s just average.
Customer capital: If your business has deep, lasting relationships with customers that provide recurring revenue, you’re likely to receive more for the business than someone with a high concentration of customers or with a lot of non-recurring revenue.
Structural capital: If your business has operating systems and processes in place to support your customer and human capital, it will provide more value than a firm where talented staff or lucrative customers are likely to walk out the door following a transaction. Systems and processes in this category include key-employee contracts and contracts with critical customers. This also includes systems to make sure intellectual property ownership is protected.
Social capital: Companies that have a clear culture that makes everyone work better as a group will attract more than those without. “In today’s world, social capital is culture, and that’s worth a lot of money if someone can come in and duplicate or expand that in their own organizations,” Snider says.
For most business owners, the biggest challenge of protecting intangible assets is guarding the firm’s human capital, Snider says. However, some companies lack contracts for important customers or have customer contracts that are near expiration as they near an exit, and that can be a big problem. Planning ahead of the exit — securing employee agreements or extending contracts of key customers, for example — can go a long way toward protecting those intangible assets.
Similarly, documenting the systems that your business uses for production, sales, customer retention, etc., is important for making sure that the corporate knowledge isn’t solely contained in people’s heads. “It’s hard for owners to want to invest in structural capital; they wonder, ‘What’s my ROI for documenting this?’“ Snider says.
“They have to understand that there could be a tremendous value in your systems, but you can’t capture the value if you can’t document it.”
Focusing on intangible assets is really about building and documenting the value of a best-in-class business. “If you focus on building a best-in-class business, your business is always going to be transferable,” Snider says. “Someone is always going to want that.”
[Article from http://www.axial.net/forum/get-top-valuation-business/]