The way that we buy and sell businesses has generally remained the same for many years—assets are valued, negotiations are made, and a price is agreed upon. While that works well for businesses that are based on tangible assets, such as inventory, products, and equipment, it gets a little more difficult for enterprises that have been built on intangible assets.
It’s much more difficult to put a value on an intangible asset, such as software or technology, than it is to put an amortized value on something that you can hold in your hands and physically exchange for capital.
As more and more startups and small businesses change direction, and move towards serving technological demands, it becomes essential to understand what intangible assets are, and how to value them.
What is an Intangible Asset?
There has been much debate over the years as to what exactly an intangible asset is. Generally, it is a non-physical asset that adds value to a company. Although, it can also include assets that are sometimes considered to be tangible, such as a logo or design, or something completely physical, like a training manual or a literary publication.
The best way to think of an intangible asset is to assume that any intellectual property, or anything that adds value to the company that you can’t hold in your hands, is included. Some of the more common intangible assets are:
- Business name and branding. This covers everything from logos, social media personas, brand ambassadors, and the actual name of the company. While you can’t place an exact price on these assets, they are still a part of the business that adds value, especially if the business you are purchasing has put a lot of time and effort into brand recognition.
- Recipes, designs, and blueprints. Say you’re buying a restaurant that is recognized by a specific dish, such as a gourmet burger or apple pie. They likely have a special recipe that you’ll need in order to satisfy the wants of returning customers. That recipe is part of what made the business successful, and what continues to bring in customers. Its value is significant, but it is not something that you can value as easily as a product. It’s not the burger that adds value, it’s how that burger was made.
- Trademarks, patents, and copyrights. Most businesses have, at the very least, a trademark or copyright. While you can determine what it cost initially, it is more difficult to calculate the value that it added to the business over the years. There are many businesses that are recognized by popular catchphrases that add an unquantifiable amount of value to their business and brand.
- Identity and reputation. Whether large or small, most businesses tend to spend money on their branding and the recognition of that brand with the public. While it does include things like logos and even packaging, it also covers things like community and charitable involvement, advertising, and brand management. If the business is publicly known for being a trustworthy and eco-friendly company, the value of that can be purchased.
There are many other different intangible assets, ranging from software to musical compositions. The intangible assets that you purchase or sell are unique to your business, so ensure that you have them valued properly in a business assessment prior to naming, or agreeing on, a price.
What Kinds of Intangible Assets Are There?
Intangible assets can be a little difficult to wrap your head around in the beginning, especially since once you have determined what a non-physical asset is, you need to be able to value it properly. There are two different types of non-tangible assets, and how you value a business depends on where the intangible assets fall.
Indefinite Intangible Assets
Indefinite intangible assets are non-physical assets that will exist for as long as the company does. These are things like business names, recipes, publications, patterns, trademarks, and so on. The rights to these assets do not expire as long as they are owned, and their availability to the business is indefinite.
Definite Intangible Assets
Definite intangible assets have expiry dates. These are non-physical assets that will only provide cash flow for a certain period of time based on either the legal or financial life expectancy of the asset.
An example would be if you were granted the rights to use another company’s or individual’s patent for a limited time.
The availability of these assets will expire at a certain point, so you are able to see when they will stop providing value or cash flow to the business.
To accurately value intangible assets, you need to weigh the impact that they have had on the business, how long they will be available to you, and if they will contribute to the bottom line in the future.
Valuing Intangible Assets
When determining the value of intangible assets, it’s imperative to have an experienced financial advisor, who can accurately calculate their worth. Since so many things come into play, such as whether the intangible asset is subject to amortization, or if you will retain full and permanent ownership of it, these factors can greatly influence the monetary value of the company.
It’s also important to be able to determine what should be considered an intangible asset and what is not, as well as if it’s important for the success of the business. While some non-physical assets may be essential to acquire, others may be more of an optional add-on in your purchase agreement.
Make sure that you understand how each intangible asset relates to the business and its cash flow. That will help you to decide if it’s something that you want to purchase, or if it’s something that you can do without.
What do you think are the most valuable non-physical assets in a company? Let us know in the comments!