If you’re a business owner, you’ll know that besides your tangible property, intangible assets also play an integral role in the modern day enterprise. It is estimated that companies today have intangible assets that represent two-thirds of the overall business value, although this estimate can vary significantly from business to business. It’s no wonder that understanding your company’s intangible asset valuation can help you further drive your business’s success.
So what exactly are intangible assets? They are non-monetary, non-physical assets such as the business’s goodwill, trademarks, software, trade secrets, industrial designs, licensing agreements, customer relationships, or intellectual property – those assets for which legal protection is often required. It’s no secret that many balance sheets exhibit a wide disparity between the market value and the book value of a company’s assets. Business owners often overestimate the value of intangible assets and, as such, this can be a common source of disagreement during purchase/sale negotiations with an independent third party or another shareholder.
Can Intangible Assets Drain My Company’s Value?
It goes without saying that any business owner looking to value an asset must take into account all the factors that impact value, including market conditions and potential market changes.
Another pitfall for business owners is arriving at an unrealistic estimate as to how long their intellectual property can support the overall value and how different these assets are from those of their competitors. An example of intangible assets draining a company’s value is evident in the music industry, when recording studios found it difficult to stem the flow of illegal music downloads, negatively affecting the value of the intangible assets.
In addition to market factors and consumer behaviours affecting value, intangible assets can be influenced by the business owner’s decisions. For example, if there is a company that decides to license its intangible property to third parties, this could not only expose trade secrets to outsiders but also empower them to become competitors. Such an outcome will drastically reduce the asset’s value and the overall value of the company.
As such, it is clear that a company that fails to properly assess, understand and protects the value of its intellectual property may risk major financial losses.
How Does Intangible Asset Valuation Position My Business For Future Growth?
Intangible asset valuation is a somewhat subjective task. These do not include cash or anything that can be transferred to cash easily. Thus, having a better grasp of the nature of your intangible assets as well as their risks and benefits will help to position your business to achieve its growth objectives. Moreover, when it comes time to sell your business or transfer ownership, you will be able to develop a more competitive pricing strategy. As these particular assets are such an important source of untapped revenue to the company (and could potentially sway your bottom line significantly), getting them accurately valuated by a professional is paramount. This will put you in a better position to:
- Measure the damages in a patent infringement case
- Negotiate property settlements associated with divorce proceedings
- Understand how much to price your business in the event of a sale
- Appease tax authorities when donating, transferring or otherwise restructuring property
It is important to remind yourself that, even if these assets are not currently generating revenue, it doesn’t mean that they are incapable of creating tremendous value in the future.
How Does Intangible Asset Valuation Work?
There are some complexities associated with valuing intangible assets. For starters, these assets may not be generating any immediate or direct income or cash flow. Additionally, if the asset is a new technology, there might not be sufficient historical data to draw from in order to predict its future cash flow generating ability. Further, gauging the levels of competitive advantage it will bring to the company is a sensitive task – one that requires due discretion.
There are many different valuation approaches to consider when valuing intangible assets – many variations of the cost, income or market approaches. As a result, a professional valuation expert may consider various approaches (e.g. relief from royalty, excess earnings, profit split, etc.) and assumptions (e.g. projected revenues, significance of the asset to the business’s products or processes, contributory asset charges, cost savings that the business obtains by using it, the economic life of the asset, etc.).
A professional valuator can establish the overall value of a company, including its intangibles. One common income approach to determining a company’s enterprise value is the multiple of earnings or EBITDA (i.e. earnings before interest, taxes, depreciation and amortization) approach. This figure represents the business’s ability to yield future annual cash flows or operating earnings.
The appropriate multiple to be applied is determined based on a thorough assessment of the various risk factors facing the business including market conditions and growth prospects. It is this overall value (after deducting the net tangible asset value on the balance sheet) that gives you an estimate of the value of your group or pool of intangible assets.
Are Your Intangible Assets Working for You?
As a business owner, you stand to achieve enormous financial gains by understanding the value of your intangibles. Call us at 905-305-VSPL (8775) and we will perform a valuation that lets you harness your assets to their fullest potential!