Creativity and Innovation: How Important Have Intangible Assets Become?
Every business owner tries to value their business at different stages to measure growth and current performance. However these valuations often disregard a vital point of value - intangible assets. In 1984, the book value of the top 150 US companies was predominantly based on what their physical assets could be sold for (75%). This steadily decreased and in 2005 that figure was just 36%. The remainder of the company’s value lies in their intangible assets such as their brand, customer databases, software code, systems/processes and their patents. The irony is that many businesses have a fixed asset register for tangible assets such as equipment, chairs, laptops but do not track intangible assets which have a greater impact on the business’ value.
Why are intangible assets so important? I mean, you can’t just walk up to someone on the street and sell them your brand image. Consider this, you have just introduced a successful new product into the market, you’re experiencing strong growth and high profits. However your brand image isn’t strong, you don’t have any patents or a customer database. What’s stopping someone else from copying you? Suddenly you’re sharing the market with 2, 3, 400 competitors. Intellectual property laws won’t permit them to patent the product and prevent you from operating but they are free to compete with you. A company that fails to emphasise the importance of intangible assets ruins any competitive advantage they had in the market.
Contrast this with a company in the same situation that has focused on intangible assets. They have patented their product, developed a strong brand image and kept track of their customers. As a result they’ve acquired a monopoly over their unique product (for 20 years), their brand can develop a reputation which leads to a loyal customer base. Remember the 80/20 rule of thumb; 20 percent of your customers produce 80 percent of your profits.
If intangible assets do add value to a company the question is how much value? It’s difficult to put a price tag on something you can’t see or touch. Should the value be based on how much the intangibles cost to create or should an impartial third party expert be left in charge of the valuation? Some investors believe that a company’s stock price reflects the market appraisal of their intangible assets. For example, Facebook has a stock market value of nearly $320 billion. The company’s assets minus liabilities totalled $44.2 billion. The $280 billion difference could serve as an indicator of the value of Facebook’s intangible assets. However the majority of companies - who don’t have a stock price or market valuation have to undertake a different process when valuing their intangible assets.
There are three factors to consider when valuing intangibles. Firstly, consider quantitative factors. These include financial metrics that help determine whether the intangibles are currently producing revenue. Secondly, look at qualitative features. These features assess the strength of the intangible assets. Thirdly, consider contextual factors. Ask yourself whether anyone wants these intangibles and if so, how much are they willing to pay?
There is no simple formula that calculates an intangible assets value however these three factors should be considered in the valuation process. Many economists still believe we’re leaving a lot to the imagination when it comes to valuing intangible assets but it is important to begin prioritising intangibles if we’re to continue innovating.