For small and medium-sized companies looking for a merger or an acquisition, intangible assets like a strong company purpose and a unique patent may be worth more than you think.

In This Article:

  • Define Intangible Assets
  • The Impact of Intangible Assets on the Value of A Company
  • Approach to Valuing Intangible Asset

What Are Intangible Assets?

The “International Glossary of Business Valuation Terms” (IGBVT) 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.”

 

What Is the Impact of Intangible Assets on the Value of A Company?

Identifying intangible assets is fundamental to helping entrepreneurs succeed. Small and medium-sized businesses have many intangible assets that may not show up on their balance sheet but are integral to their success. By identifying these assets, advisors can help business owners increase their odds of success by including them in valuation discussions.

A recent study by Fortuna Advisors found that companies with a strong purpose (or "purpose score" as defined by BERA) tend to have a higher valuation than less mission-oriented companies.

BERA's data encompasses four dimensions and 13 attributes- emotional, functional, experiential, and purpose-related. While a company's purpose is critical to creating intangible value in a business, buyers want to realize this value through increased earnings and cash flows over time.

 

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Source:Fortuna Advisors

The world is changing fast, and new alternatives are popping up all the time. In the past, young companies were more likely to focus on growing quickly and adopting an established market position. The shifting nature of work has impacted the way organizations view intangible assets. Instead of valuing only tangible assets, organizations are valuing the intangible assets that contribute to organizational purpose and success. Purpose-based companies are more likely to be innovative leaders, supporting innovation and entrepreneurship among their users and clients. Over the past three years, "High Purpose" companies earned TEV/ EBITDA multiples over 3x that of "Low Purpose" companies. The valuation multiples compressed in the first half of 2020; however, High Purpose companies rebounded strongly in the second half of 2020, widening the TEV/EBITDA gap to Low Purpose companies by over 70% to +5.6x.

 

 


Source:Fortuna Advisors

 

What Valuation Approach Can be used to Factor in Intangible Assets?
 

In business valuation, separating the intangible value of a company between personal and enterprise goodwill is becoming increasingly relevant and is constantly being updated. BizEquity valuation reports provide four value estimates, allowing you to discuss the most impactful valuation metrics with business owner clients. In general, the asset sale and stock sale values are most relevant from a transactional point of view when factoring in intangible assets such as the company's purpose. When used for entity sales, buyers will acquire either "assets" or "equity" with the asset value typically consistent with enterprise value. 

 We can calculate the asset sale value using  inventory/supplies, fixed assets (furniture, fixtures, and equipment), and all intangible assets (goodwill, customer base, trade name, covenant not to compete, etc.). The Asset Value estimate excludes all liquid financial assets and all liabilities.

 

 

 

 

Click here to learn more about how the level of intangible assets and goodwill vary by industry