Joel Hanrahan, co-CEO – Global Markets, Everedge Global, joined Legalwise Seminars to discuss key questions regarding valuation of intangible assets. Hear more from Joel at the upcoming Business Sales and Transactions Summit webinar taking place on Tuesday, 12 March.
What are the typical intangible assets of the company? Could you provide examples, both common and uncommon?
No two businesses are alike. But broadly speaking there are 12 types of intangible assets: relationships, confidential information, industry expertise, design, approvals & certifications, plant varieties, content, invention, brand, software, network effects and data. The precise mix of these assets will be as unique as the company itself.
These days, most companies gather data on their customers, operations, supply chains and a thousand other factors. Some businesses set out from the beginning to align their strategy with the data they want to collect, while others don’t have the first clue about how their data might add value. Data can improve a company’s valuation if management can figure out ways to leverage it.
In other words, mixing data with industry expertise can unlock even more value. Industry expertise is a key intangible asset in the modern economy, described by the idea of the Pareto distribution: 80% of the work is performed by 20% of the staff. Sometimes, the most important operations in a business may be due to just one or two employees. Their expertise is a real intangible asset which can be valued.
If that expertise is recognised as an asset, a company might try to capture it by writing how-to guides that outline the optimal operation of machinery, for example. This content would immediately become a new intangible asset that can be highly attractive to a potential buyer looking to acquire a company for its expertise.
Understandably, some types of intangible assets – such as plant varieties or network effects – are less common. However, plant breeders can apply many of the same strategies for these intangible assets to capture large pieces of a market. Likewise, while a network effect usually appears in social media companies, the tactics for creating the right conditions for a network effect apply across asset types.
What are the most common challenges encountered in the valuation of intangible assets?
Today, more than 90% of a company’s value is intangible.
Intangible assets are the primary factor in both profitability and growth. Unfortunately, these assets are ignored by accounting standards: they are either left off the balance sheet, lost within the amorphous term “goodwill” or, worst of all, recorded at cost.
Conventional valuation methods tend to misvalue intangible asset-rich companies – companies that are doing something different – and often fail to value intangible assets such as data or brand at all.
That’s a huge problem when raising capital, exiting a business, pricing a product or creating partnerships. In short, a lot of money is left on the table.
For many companies, the biggest “ah-ha” moment in an intangible asset valuation often comes when a value is ascribed to the individual assets of the organisation. Management can be so laser-focused on running the business that, even with an excellent strategy, they may be unable to see what is driving their true value. They might have an instinct about this value, but verbalising precisely what those assets are can be deeply enlightening.
If you can identify the intangible assets driving a company’s competitive edge within the valuation process, it will help management teams:
- Improve decision-making for an exit, capital raise, M&A, JV or licensing transaction;
- Understand how they can protect these assets and their value;
- Better articulate value to shareholders, investors and stakeholders;
- Defend licensing or tax transactions along with litigation positions;
- Understand which R&D projects will generate the best “bang for the buck.”
Lastly, what advice do you have for professionals seeking to enhance their skills in this area, especially those unfamiliar with the assessment techniques?
International accounting standards simply haven’t kept up with the reality that most of the value in today’s companies is intangible. This means that approaching a business with the assumption that all value will be recorded accurately in the books is a mistake. The revenue and EBITDA numbers are likely to be accurate, but they won’t reflect the full value of that company.
Our advice would be to think like a CEO. If you had $1 to spend, which operations would result in maximum revenue? Working backwards, you can then see which components of the particular operation are so valuable and why. Then it’s just a matter of isolating those intangible assets and understanding what the business utilisation cases that would allow you to monetise these assets – and also the ways that the assets can and should be protected.
That’s a cartoonish description of intangible asset valuation. But it helps to highlight a crucial lesson: the only way to accurately judge the worth of a company is to adopt a holistic understanding of what a business is. Even a failed company will have valuable intangible assets to recover. Essentially, when looking at a company you should assume that a significant level of value will not show up on the balance sheet or in financial accounts. Until accounting standards catch-up, it is critical to look beyond the balance sheet at the underlying assets that are driving a companies value and competitive edge.
About EverEdge
EverEdge is a global intangible asset advisory, corporate finance, and investment firm. Today, intangible assets account for 90% of enterprise value for companies in the S&P 500. EverEdge helps companies and investors unlock the value of these intangible assets and reduce intangible asset risk by identifying, strategizing, valuing, and monetizing intangible assets. www.everedgeglobal.com
Joel is co-CEO at EverEdge, a global Intangible Asset advisory, corporate finance and investment firm. Joel helps innovators, entrepreneurs, leaders of companies, and capital providers globally convert Intangible Assets into business impact: increased margins, market share and enterprise value. Joel has significant global experience with market-leading firms including PwC, KPMG, Telstra, Ashurst and Computershare. He has led programs of work across industries as diverse as physical infrastructure, cybersecurity, data governance, renewable energy, financial services, investment banking, private equity and insurance. He is a specialist in leading and advising organisations in phases of substantial development, specifically major revenue-growth programs across multiple jurisdictions, service lines and involving large groups of varied stakeholders. To contact Joel please email joel.hanrahan@everedgeglobal.com or call +61 409 918 101
