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What is the Intangible Value of a Business?

When determining the value of a business, the major determinant is the average of past cash flows.  The higher the cash profits of the business the higher the value.  But only looking at the tangible factors of a business runs the danger of "leaving money on the table" - it doesn't always take into account other intangible factors such as:
  • Goodwill.
  • Patents or proprietary technology.
  • Particular products or services unique to your business.
At a minimum, a buyer will be willing to pay the baseline economic value (the value placed on the company via the full evaluation process).

However, many sellers lose the opportunity to obtain appropriate value for the intangible components of the business - often because they cannot clearly document, substantiate and assess the intangible value of these components to their businesses.

Whilst the impact on value of intangible components is, by definition, difficult to quantify, it is not impossible.  Intangible factors at some point will impact on the cash flow of the business.  If an intangible factor is never going to benefit the business in any material way then it is superfluous and is not a benefit.

Qantas marketed the fact that it was the "safest airline in the world" and used this intangible factor to position its pricing and services and differentiate it's position away from other international airlines.  It may now get a chance to measure the value of this branding as its revenues suffer due to recent industrial disputes.

Intangible factors usually impact the cash flow of a business through customer loyalty, new products or services, brand recognition or industry acceptance.  The key is to come to some agreement or understanding on what the range of potential cash flow impacts are and then assess the likely additional value of those factors.

A recent customer survey for one of our clients found the business had very strong awareness in their industry as being the industry standard and having the a high level of technical competence, knowledge and understanding.  This is somewhat different to just brand recognition - it is acceptance of the technical expertise of the people within the business. 

This technical expertise has helped the business develop a commanding market share in their industry.  Loss of this technical expertise or loss of its recognition would eventually result in a dramatic fall in sales - and hence a loss of value for the business.

The valuation methodology will vary depending on the nature of the intangible factors, but there are some key steps that are critical in all cases:
  1. Document the exact nature of the intangible factors and how they differ from what your competitors have.
  2. Understand clearly and concisely how these intangible factors will impact the cash flow of the business.
  3. Consider a range of potential cash flow scenarios for each of the major and distinct intangible factors.
  4. Look at how the potential cash flow scenarios will impact the value of the business.
Intangible factors are a key way to ensure you get a premium for your business and often mean the difference between getting enough for the business and getting a fair and reasonable return for the business. 

Don't leave your hard earned money on the table for the buyer to cash in on - make sure it leaves in your pocket when you sell.

What Next? 

Have you considered what the intangible factors of your business are worth?  Do you want to assess the level of your goodwill?

Do you know if your business has more or better intangible value than your competitors?

Understanding these factors can help your business strategy and make sure you don't leave any money on the table.

We would be happy to discuss this over the phone with you and explore how you can leverage your intangible factors to give you a better price when you sell your business.

Maxell Consulting has helped many businesses identify the value of intangible factors in their business and empower the owners to develop plans to crystallise that value.  

We offer a free assessment of your situation and review what potential value exists within your business.