Before any major business decision, it is important you know the worth of your company. But this is sometimes a difficult process as there are many intangible assets to keep in mind.
“Intangible assets are unique brands, combinations, and/or collections of particular processes, activities, relationships, or market conditions that companies can exploit to differentiate themselves from competitors, and thus create value,” according to Michael D. Moberly, founder of St. Louis-based Knowledge Protection Strategies.
Intangible assets are very important because they are essential to the success and future success of a company. “They are,” says Moberly, “the primary source of a company’s competitive advantage which lie increasingly in unique and sometimes proprietary knowledge and processes a company possesses and…can be used to provide a competitive advantage – edge for a company.”
Intangible assets can include anything from technology to advertising concepts to relationships and intellectual property. And because we are doing business in such a digital age intangible assets are important to a company’s bottom line. “There is no other time in business governance history when larger percentages of company value, sources of revenue, competitive position, and future earnings potential are so deeply rooted in a company’s intangible assets, intellectual property, know how, and brand, etc.,” says Moberly.
He says it is important that company management teams regularly assess the value of their intangible assets because:
1. Intangible assets are non-physical. They lack, for example, a conventional sense of physicality or physical presence. Such things as reputation, image, goodwill and brand are considered intangible assets. “Nevertheless intangibles are embedded in a company’s sources of revenue, competitive advantages, profitability, and sustainability,” he says.
2. Intangible asset value can vary relative to its contribution to company functions.
3. Intangible asset value is perishable and generally non-renewable.
4. Today, slight advances in technology, minor improvements in production, and/or small refinements in business processes through better utilization of intangible assets can afford companies tremendous competitive advantages over their market rivals.
5. If intangibles are dismissed or neglected by company management teams, there is a substantial probability that such initiatives as new project launches, competitive advantages, marketing programs, and strategic planning will be stifled, undermined, or certainly less than their potential.
For the tangible assets, mergers, acquisitions, and valuations, expert Grover Rutter suggests the following: “Get the company financial statements/tax returns in order and have copies readily available; update the company depreciation schedules (deleting assets no longer owned and adding recent additions); and engage a Certified Valuation Analyst and or an Accredited Business Valuator.”
Don’t use standard formulas when calculating your company’s worth says Rutter. All companies are not alike.
Another mistake in calculating the worth is “that most business owners (and their advisers) do not understand what, exactly, is being valued” he says. “Is the opinion of value representative of the company’s enterprise value or its equity value? Enterprise value is the total debt free value of the company while equity value is the after-debt value of the company. For example, a company’s enterprise value (value of total assets) might be $4 million. But, if that company has debt of $4.5 million, the equity value of the company would be a negative $500,000.”
Don’t compare your company to another company’s worth. Just because one company sells for a certain amount doesn’t mean yours will sell for the same amount.
“Also, business owners do not understand what business buyers are seeking. This situation is like trying to place a square peg into a round hole. The business may have self-perceived worth to the current owner; however there may be few (or no) buyers who would have the same perception of worth,” says Rutter. “An example might be sentimental value.”
This is a mistake that many may not know they are making. “Many business owners do not take the time to really get to know their own businesses,” advises Rutter. “Accordingly, the owner’s perception of value is skewed. Owners spend so much time running their business, that little time remains for them to analyze the value drivers and value killers within the business.”
So get time to understand your company and what it’s vaule—seen and unseen--is.