Valuing Intangible Assets During a Business Sale
When selling a business, you need a proper valuation to ensure that you receive a fair price for the years you have spent building your company. This will include valuing tangible assets such as your equipment, inventory, and real estate, as well as intangible assets such as goodwill and intellectual property.
As challenging as it can be to assign a value to tangible assets, it can be far more difficult to accurately value assets that are intangible. This valuation is more subjective, more art than science; and consequently, it is the source of many disputes during business sales.
Understanding Intangible Assets: Intangible assets are non-physical assets that a company possesses. These are assets that do not appear on a balance sheet and they have no recorded book value, but they are often a major driver toward enhancing the balance sheet and contributing to the overall success of the business.
An intangible asset could be temporary or finite, such as a contract or agreement that lasts for a limited time. Or it could be an indefinite asset that continues for as long as the business is in operation, such as an established brand name.
The calculation of all the intangible assets within a business is often referred to as “goodwill”, although this term is also used separately to describe the established reputation of the business. Positive goodwill is earned by being in business for a significant length of time, developing a sizable and loyal customer/client base, establishing a reputation for quality, and similar attributes.
Here is a closer look at some of the most important intangible assets that may factor into the calculation of the company’s goodwill:
Brand Recognition: When we think of brand recognition, multibillion dollar corporations like Apple and Coca-Cola come to mind. With companies like these, the power of their brand alone accounts for hundreds of millions (or perhaps billions) of dollars in sales each year. But every established business, large or small, has a brand attached to it, whether it be positive or negative.
Your brand is a big part of what distinguishes you in the marketplace. This could include your name, logo, symbol, mark, or slogan. But it is also what customers and the overall community believe that you represent. If your customers trust you and believe you put out a quality product or service, then you have a positive brand that adds value to your business.
Intellectual Property: Examples of intellectual property may include copyrights, trademarks, patents, tradenames, proprietary computer software, proprietary sales processes, recipes, and other types of trade secrets. Using the Coca-Cola example again, the recipe for Coke Classic is one of the most valuable and closely guarded industry trade secrets.
Digital Assets: If you have a domain name, website, and social media accounts, these are intangible assets that could be enhancing the value of your business. For example, some of the pages and posts on your website might have high search engine rankings, meaning that they help digital consumers to find you online. You might also have a good number of positive reviews on your Facebook page and in other sites like the Better Business Bureau (BBB) and Google Reviews. High web traffic and positive online reviews will definitely grow your customer base and make your company more valuable.
Human Capital: Oftentimes, the most important intangible asset a business possesses is the people who work there. For example, if you have talented management and staff that goes above and beyond to deliver exceptional service, this is a major factor that distinguishes your business from comparable businesses in your area. You might also have established relationships with clients or customers who provide strong ongoing revenue.
Contracts and Agreements: The contracts and agreements you have with your building owner, suppliers, vendors, and other associates could make a major difference in the viability of your business. For example, maybe you are locked into a long-term lease at a rate that is far below market value and gives you a strong competitive advantage.
This was the case with the Minneapolis Kmart, which was the last Kmart to close in Minnesota. The reason the store held on so long despite the company going bankrupt was that their lease, which was signed in the 1970s, allowed them to pay just $0.38 per square feet each year, which is far below the market rate. This made it one of Kmart’s most profitable stores.
The Importance of Working with an Experienced Business Intermediary: Assigning an accurate value to intangible assets can be extremely difficult, and to complicate things even further, owners tend to overestimate the value of these assets because of the amount of personal investment they have in the business. This is why it is always a good idea to work with a business intermediary who understands the business sales process and can help you obtain a proper valuation. Business intermediaries are professionals who handle these types of transactions on a regular basis, and they also provide an outside perspective that owners are less likely to have because of their direct involvement with the business.