Creativity and Innovation: How Important Have Intangible Assets Become?

INNOVATION

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.

The Rationale

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.

Valuing Intangibles

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.

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David Burkett

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