10/7/2004
Your Business May Be Worth More Than You Think
By ARI KASHTON, BComm, CA, CFP, Manager Business Valuation & Litigation Support Group
When it comes time to value your business, ensure you consider the value of your business’ intangible assets.
What are intangible assets?
In general terms, the International Glossary of Business Valuation Terms defines “intangible assets” as non-physical assets such as franchises, trademarks, patents, copyrights, goodwill, equities, mineral rights, securities and contracts (as distinguished from physical assets) that grant rights and privileges, and have value for the owner.
The definition above is a good overview; however, a more comprehensive (but not exhaustive) list compiled by the US Financial Accounting Standards Board includes the following intangible assets:
Marketing-Related Intangible Assets
• Trademarks, tradenames
• Service marks, collective marks and certification marks
• Trade dress
• Newspaper mastheads
• Non-competition agreements
Customer-Related Intangible Assets
• Customer lists
• Order and processing backlog
• Customer contracts and the related customer relationships
• Non-contractual customer relationships
Contract-Based Intangible Assets
• Licensing, royalty and standstill agreements
• Advertising, construction, management, service or supply contracts
• Lease agreements
• Construction permits
• Franchise agreements
• Operating and broadcast rights
• Use rights such as landing, drilling, water, air, mineral, timber cutting, etc.
• Servicing contracts such as mortgage servicing contracts
• Employment contracts
Technology-Based Intangible Assets
• Patented technology
• Mask works
• Internet domain names
• Unpatented technology
• Database, including title patents
• Trade secrets including secret formulas, processes and recipes
As can be seen from the list above, there are many intangible assets to consider when valuing your business.
How much can intangible assets be worth?
A recent U.S. study of public companies emphasized the significant impact of intangible assets in today's business values. According to this study, twenty years ago, book value amounted to approximately 95% of a company’s market value; with intangible asset value comprising the remaining 5%. Twenty years later, this study found that intangible asset values had increased significantly and book value reflected only 28% of market value. Based on this study, an owner who mistakenly omits intangible assets may be undervaluing their business by as much as 72% of its potential market value.
Depending on the business, the value of intangible assets can be tremendous. For example, in 2003, the intangibles of computer chip manufacturer Intel were estimated to be $35.3 billion (“The Hidden Value of Intangibles”, Ben McClure, January 6, 2003, investopedica.com).
A Word to the Wise!
When valuing your business’ intangible assets, professional advice is highly recommended because a proper valuation can identify the full worth of your business.
This article has been prepared for the general information of our clients. Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.
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