Intangible assets are an important part in determining the overall value of a business.
In her article, Head of Altius Corporate Finance, Vickie Elson-Hood, discusses how to value your business’ intangible assets and why it’s vital when considering the sale of your business:
Traditionally, tangible assets such as buildings and plant and machinery have been the primary source of a company’s value (Balance Sheet). However, certain assets without any physical substance have become vital components of any business’ success. These assets should be important aspects of valuing a business. They include for example:
- Reputation (Goodwill)
- Brand value
- Industry experience and knowledge
- Relationships
- Intellectual property e.g copyright, patents, designs, trade marks
Valuing intangible assets
The first step to valuing your intangible assets is to actually understand and identify what intangible assets your business has built up.
To be recognised as an intangible asset, it should be ‘separately identifiable’ and ‘measurable’ but with no physical presence – so valuation can be challenging. A number of methods exist including:
- Market Value: Uses the price paid for comparable intangible assets in your industry to assess market value.
- Income Method: Calculates the future economic benefits your intangible assets will generate. This involves estimating future cash flows and discounting to their present value.
- Cost-Based Approach: Estimates the cost of creating or acquiring a similar asset from scratch.
- Royalty Rate: Estimates the rate that would be paid if the asset was licensed to a third party.
What is the impact on your business sale?
When you are considering selling your business remember that intangible assets can be a key factor in the price you achieve. Intangible assets often give a business its unique selling points – but by their importance can be viewed differently by different buyers.
When selling your business, it’s imperative you demonstrate the future value of the opportunity acquiring your business creates for buyers – and the potential future success your business could deliver in their hands. You want them to have confidence in the future of the business as a whole, not just the reported balance sheet. Intangible assets such as ‘goodwill’ e.g. reputation, strength of client relationships etc will play an important part in that vision.
Intangible assets can create a strong competitive advantage for a business, so understanding that advantage will help drive value through the sales process.
What can you do?
Consider the evidence you can provide on the value of your intangible assets to support your ‘business story’. Alongside past financial performance, a buyer will be looking for evidence to support future growth. Whilst putting an exact value on ‘goodwill’ such as brand and reputation can be difficult, by having a clear understanding of the intangible assets your business owns, with a clear understanding of the value to the future of the business, you can encourage prospective buyers to see your business’ real potential.
Understand your buyers
Depending on their objectives, different buyers will view the value of intangible assets differently. This is where the experience and expertise of your broker will be invaluable.
Your broker should be alive to potential buyers’ circumstances and objectives – and the specific value e.g. of goodwill, reputation or knowledge to them. Whether seeking a business with a strong brand and customer loyalty, planning expansion through competitor acquisition, or looking for the benefits of accessing and sharing knowledge to drive growth across an existing business, in some cases intangible assets can be more valuable than tangible assets
It’s important your adviser works closely with you to ‘get under the skin’ of your business so they share your vision and help buyers to visualise the true potential of your business in their hands.
For a confidential discussion about your plans for selling your business please don’t hesitate to contact a member of our team.
