Most small business owners are unaware of the impact that their customer bases and brand have on the value of their enterprise. While various rule-of-thumb formulas exist in some industries, a more reliable estimate of value is achieved with an in-depth analysis of intangible assets.
Valuing Non-Material Assets
Intangibles, such as client lists, name recognition, and customer goodwill, can be appraised as valuable non-material assets similarly to securities, accounts receivables, real estate, and physical equipment. Below are a few of the most significant intangible assets and the method of valuation.
- Trademarks or Brand Names: A common valuation method of brand names and trademarks, which are both extremely valuable, is based on how much more a business can charge for its goods than comparatively unknown competitors.
- Franchises or Other Licenses: Well-recognized franchises with a proven track record are valuable. A standard method of valuing franchises is based on profit advantages over comparable businesses due to the nature of the license.
- Patents and Patent Applications: The worth of a patent depends on its legal and economic lifespan. A patent application’s valuation depends on the vitality of its claims.
- Goodwill: Client goodwill is based on your business’s relationships and reputation with customers, vendors, and the community, and its partnership with trade-related activities. It is the value of having an established business so that a buyer of the enterprise would not have to seek customers and assemble the company from the ground up.
- Technical Libraries and Additional Specialized Data Repositories: Many libraries carry nearly irreplaceable material, which can be exceptionally challenging to reproduce. Valuing these assets is performed by subtracting losses for obsolescence from the cost of recreating them.
- Secret Processes, Formulas, and Methods: Because these assets are not patented frequently, the valuation must be based on cost savings or profit advantages provided by the asset. Because secrets are precarious, and these assets are unstable, an appraiser’s judgment often weighs heavily in these valuations.
- Proprietary Lists: Many types of records, such as subscription or customer lists, are often sold, bought, or collected for internal use. Lists are particularly valuable if they represent continuing business relationships. Values may be based on the repeat sales generated or the cost to replace a list.
- Contracts: Specific contracts, including sales, advertising, affiliation, or employment, are considered intangible assets because they contribute value to a business. Other examples of valuable contracts are subscription contracts, such as a cable business’s revenue that is supported largely by long-term service contracts or agreements sold by the company.
- Tax Credits for Past Losses: The IRS permits some losses to be carried forward or carried back. If a corporation has losses, they may be carried forward for a set number of years to offset profits. The result is a tax savings. The expected tax savings can often be estimated, contributing value for this asset.
Valuing intangible assets is crucial to business growth and development. It is important that they are valued as individual components but identified along with tangible assets.
Independent business valuation analysts have been valuing intangible assets for years, typically in the context of part of a litigation assignment, gift and estate tax purposes, or transactions such as an exchange between owners. Valuation assignments must consider problems with protection and enforcement, determine the ongoing creation and value of intangibles, and recognize the volatility.
Business valuation is a set of standards and process utilized to determine the economic value of an ownership interest in a business. It is warranted in the event you decide to take your company public, or for financing, shareholder disputes, mergers and acquisitions, and divorce. The absence of timely and accurate valuation of intangible assets could cost you millions. The bottom line is, it is crucial that small business owners understand the difference between the methods that accountants, lawyers, and potential buyers may use to value your business.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.