In BVR’s collection of Exit Planning/Exit Strategies writings for business valuators and small business owners, there is an article that reinforces the arguments we have been making regarding intangibles, their lack of visibility and their contribution to business value. Here it is below.
The True Value of Your Business May Not Lie in the Financials
“Let’s see. Right here on the Balance Sheet are all of my assets, right? I can pretty much come up with a bottom floor valuation of my business right here. Book value would be …” This may be a conversation you have had with your advisor very recently as you start to think about exit strategies/exit planning. One of the mistakes business owners make when thinking about selling their business or evaluating other succession planning strategies is thinking only about tangible business assets and ignoring the intangible assets … the assets that may well be the true value drivers for the business. Experts estimate 65-70% or more of the assets that drive business today are intangibles … and the number is climbing. (It is obviously a lot more than that for technology companies today.)
Business owners left to their own devices will roughly calculate a business value without ever taking their intangible business assets into account. As Gary Brooks recently stated in All Business, “Sometimes they don’t realize how much intangible value they have acquired over time just by [being in] business.” What’s even more important, there are ways to find, unravel, inventory and quantify your intangibles so that they dramatically influence sale negotiations.
The obvious intellectual property rights you can think of right away. Do you have any patents? Have you registered any trademarks? Your manuals are surely all copyrighted (right?), and if you filed copies with the federal copyright office (Library of Congress), you have significant statutory protection for those rights.
What about those not-so-obvious intangibles?
Do you have brand recognition in your chosen markets? How good is it relative to the competition? What level of customer service is associated with your brand? Are your goods or services widely perceived as being of high quality?
How talented are your employees? How essential to your maintaining competitive edge are they?
Do you have processes and methods you have learned over time that give you competitive advantage? If you are a restaurant, have you developed proprietary recipes?
Do you have recurring revenues, from many, diverse customers? How loyal is your customer base? How well developed, current and responsive is your customer list?
An experienced, certified business appraiser can help you through the process. It’s important, as proper identification and valuation of your intangibles can add significantly to the value of your business.