Valuation of businesses intangible assets…decision makers are obliged to know what comes before and after the dollar sign!
The value of intangible assets is the underlying connective (business) tissue…from which an objective narrative should emerge that describes intangibles as consistent contributors to a business’s value, i.e., as sources of revenue, competitiveness, reputation, and sustainability! See this blog’s post titled ‘What Are Intangible Assets’ https://kpstrat.com/wp-admin/post.php?post=5393
On the other hand, there may be nothing inherently or particularly valuable about…the (physical) paper or coin currency a company may have, or a bar of gold held in the Fort Knox Depository other than our collective inclination to believe (reliance, assurance) that currency and/or gold has designated value upon which citizens can use to purchase, lend, or invest.
Such universally accepted beliefs, in large part, exist because…we know, believe, and/or assume that other people, institutions, and sellers of goods and/or serves also know, believe, and assume that certain denominations of currency and bars of gold have (an agreed upon) value and those in possession of either accepts it as methods of payment for the purchase of specific amounts of goods and/or services, etc.
Through the lens of this intangible asset strategist and risk specialist…intangible assets acquired – developed by a business or individual share some similarities. That is, intangible assets have value, which generally emerges from their contributory role…
- insofar as producing intellectual, structural, and relationship capital, which
- favorably affects sources of revenue, competitiveness, brand/reputation, and sustainability, etc.
However, unlike currency and gold bars…company’s seeking to sell their, or by other intangible (non-physical) assets, the process often involves various levels of persuasion and pre-post due diligence that should focus on – unravel…
- how, when, where, and why particular intangibles’ actually produce – generate value, i.e., revenue, competitiveness, reputation-brand, sustainability, etc.
- the assets stability, fragility, and vulnerability to specific risks, which should they materialize, can-may adversely affect whether the assets can sustain – enhance their respective contributory roles or whether same will fluctuate?
To be sure, it’s prudent for buyers and sellers of intangible assets to recognize the intricacies of both, ala…
- it is an irreversible – irrevocable, and universal economic fact today that 80+% of most company’s value, sources of revenue, competitiveness, and sustainability lie in – emerge directly from intangible assets, primarily intellectual, structural, and relationship capital.
So, it is worthy to note again, perhaps in a slightly different light, that holders-developers of non-physical assets are also obliged to recognize…that significant, and growing percentage of their intangibles’ which will be sought for purchase or licensing via conventional buy-sell transactions, mergers, and/or acquisitions, etc., are indeed intangible https://kpstrat.com/wp-admin/post.php?post=5532
But, the contributory roles and value which many intangibles’ produce -deliver, i.e., as contributors to business value, competitiveness, revenues, and sustainability, etc., can be variously obscured by…
- their absence of physicality, and
- not knowing precisely where and how intangibles ‘fit’ on balance sheets and financial statements.
Consequently, and with varying frequency…their proprietary – competitive advantage features and values, not infrequently, are under-appreciated, unrecognized, and undervalued.
In some respects, this is what behavioral economists frequently refer to as the ‘tinker bell effect’…i.e. the value of ‘x’ lies only in – emerges from a ‘community of belief and acceptance’.
So, with respect to businesses intangible (non-physical) assets, their contributory role and value…are not infrequently, still perceived by many conventional professions, i.e. financial services, valuation, and accounting, etc., as being variously subjective and/or an amount subject to negotiation, sometimes in mystifying ways.
Today, building – assessing value is a collective narrative about a business brand, reputation, competitiveness, and sustainability, etc., in which leadership are fiduciarily obliged to not only identify and distinguish, but articulate with clarity precisely how, why, when, where and under what circumstances key intangible assets develop to possess, produce, and deliver contributory roles to the collective value, sources of revenues, competitiveness, and sustainability of their business.
Now, that’s a very valuable and powerful business concept to be leveraged at will.
But, there remains considerable friction…within conventional institutions, systems, and education regarding the contributory role and value of (businesses) intangible assets. https://kpstrat.com/wp-admin/post.php?post=244&action=edit&rp4wp_parent=11660
The points I wish to make are…
- there is indeed, inherent ‘contributory’ roles and value which lie in – emerge from most business’s intangible assets, and
- business leadership are obliged to collectively acknowledge (identify, distinguish, monitor, and assess) that value and those contributions.
- the contributory roles, value, and competitiveness a business’s key intangible assets produce – deliver to a particular-product, service, or project can, and will likely (periodically) fluctuate, those assets will warrant monitoring as other (types-categories of) intangible assets become dominant.
Additionally, understanding what intangible assets one’s business has…developed, acquired, matured, and have distinguishable relevance to company value, revenue generation, competitiveness, brand, and sustainability are, collectively, prudent preludes to (asset) valuation and monetization!
- unfortunately, there remain a significant percentage of business leadership teams and boards whose perspective of intangible assets is narrowly conventional, that is…
- my experience suggests, having engaged literally hundreds of business executives and management/leadership teams representing all sectors, its clear that…
- many retain an outdated, if not obsolete, perspective about intangibles, i.e., they exist primarily, if not solely, in the context of goodwill.
Respectfully, many of these professionals convey little appreciation for…the range of intangible assets that most companies, including theirs, have probably (already) developed, acquired, and are effectively exploiting, outside the buzzed arena of brand. Otherwise, their businsses intangibles, not in frequently, do not breach their conventional ‘mba radar’.
Intangible asset valuation; the challenges of unintentionally ‘getting one’s cart ahead of your horse’…the prudent approach I believe, and one which I find especially useful in engagements, is to…
- first…engage management/leadership teams and boards in quick, and above all, relevant exercises designed to respectfully convey operational level familiarity with their businesses intangible assets, well beyond the narrow goodwill only context.
- second…describe and apply viable – relevant, and company specific strategies to value their businesses existing intangible assets their ‘contributory roles and value’ to specific aspects of a company and its mission.
- third…once this occurs, attention should correctly turn to exploring options and strategies to more effective leveraging, exploitation, and monetization of a company’s full array of intangible assets!
Insights embedded throughout this post are variously attributed to Dr. Neha Nerula, Director, Digital Currency Initiative, MIT Media Lab https://dci.mit.edu/ and her exceptional TED Talk https://www.ted.com/talks/neha_narula_the_future_of_money
Michael D. Moberly March 26, 2019 https://kpstrat.com/blog St. Louis [email protected] ‘Business Intangible Asset Blog’, since May 2006, 650+ published blog posts, read in 137+ countries, ‘where business intangible assets, attention span, and solutions converge’.
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