Imagine two companies – Company A and Company B. They are in the same industry and based in the same city, with similar financials and growth projections. So, when the owners decide the time is right to exit, you would imagine that both businesses would attract a similar price?
In fact, business buyers are paying a premium price for Company A, while Company B is struggling to find a buyer. How can this be? Aren’t the buyers using similar business valuation models in order to determine the value of potential targets? The answer to this significant divergence in price can be explained by two words: intangible assets.
Here is the official definition of intangible assets according to Investopedia:
The important thing that business owners need to know about intangible assets is this: they can play a significant factor in a buyer paying a premium for a company, but do not appear on a balance sheet. This means that two companies can have drastically different values to potential buyers even if every tangible aspect of their business is identical.
These intangible assets are the factors that give your company its unique selling points, and impact your business worth in a way that it wouldn’t for another company. Their relative value will depend on the buyer, although there are steps being made by some of the world’s largest firms to implement systems to accurately measure these values. The Coalition for Inclusive Capitalism, which includes the chief executives of Unilever, PepsiCo and Nestlé, aims to create a unified measurement of a company’s long-term value, and is something our professionals at Generational Equity will be keeping a close eye on.
For the time being, as the “worth” of these intangible assets vary based on a buyer’s business valuation model, it is vital that company owners do a complete analysis of these assets as part of your comprehensive business exit strategy.
Quite often, identifying the intangible assets in your business can be difficult to accomplish. This can be due to a variety of reasons. Perhaps you as the owner are so embedded in the operations of your business, you take these intangibles for granted rather than appreciate their true worth? Or, you simply may not have time to conduct a detailed analysis of these “off balance sheet” assets and what impact they are having on your overall business value.
To give you a helpful starting point, we have put together a sample checklist that you can use as a template for your company’s intangible asset review process. This particular example focuses on the intangible assets of a manufacturing enterprise, although many can apply to a company in any industry. We recommend you use this as a guideline, but also seek professional guidance to ensure you cover all intangibles for your business.
This list is by no means exhaustive, but should help give you an indication of the intangible assets in your company that, while don’t have a fixed value, could make the difference in buyers pursuing your business over another. This is extremely important, which is why we recommend you sit down with your trusted advisors to help you brainstorm over what sets your organization apart.
Why is this such a crucial step? Because finding the optimal buyer for your business will depend greatly on your intangible assets. Each buyer will evaluate a company differently based on these details, so it is important to document, analyze and understand your intangible assets to locate the ideal buyer and secure the best return on investment for your business. The more you know about the true value of your business, the better your chances of completing a successful exit.
Our experienced M&A advisors at Generational Equity are here to help you find the value in your intangible assets. They will ask the key questions to establish your business’ true worth, and find an ideal buyer through our extensive middle market portfolio, DealForce. If you’d like to learn more, attending one of our complimentary executive conferences will offer greater insight into business valuation models and creating the ideal exit strategy. These are held regularly across North America, so please check to see when we will next be in your area.
You can also reach us on our dedicated contact page. We look forward to hearing from you soon.
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