Getting More For Your Company By Identifying Its Intangible Assets

By Generational Equity

03/11/2015

When you approach buyers with the opportunity to acquire your business, you need to be clear about what your company’s value proposition is to a specific buyer. What features does your business have that would add value beyond the pure number-driven economic value of your company? But before you can determine what these features are, we need to define “intangible assets.”

Intangible assets, according to the Generational Equity M&A Glossary, are:

Intangible (Hidden) Assets – The assets of a business that have value but are nonphysical and not shown on the balance sheet, such as patents, software, heavily depreciated fixed assets, strong contractual relationships and an experienced workforce. Also referred to as Off Balance Sheet items.

Examples of Intangible Assets

Here is a list of intangibles that might apply to your business:

• Patents, Trademarks, or Copyrights – Depending on the industry you are in, these items can have tremendous value to certain synergistic buyers. The key is finding the right buyer who will pay a premium for the patents or trademarks that set your company apart.
• Key Customers – This is especially true of those with whom you have long-term contracts. Often you see the value of your customers when you finally get paid for an invoice. However, the true value to specific buyers could go well beyond what you generate every month from these key customers. Often a buyer will pay a significant premium over a financial value simply to gain access to a solid, stable customer base.
• Employees – Let’s face it, in many service-based industries your employees are the face of your company. If you have employees with long tenure, recognized experience, and solid credentials, some buyers will be willing to pay a premium for your organization in order to gain access to this talent.
• Processes & Procedures – If you have been successfully manufacturing a product or providing a service for several years, chances are good that you have developed specific time-saving and cost-saving procedures and/or processes. These can be extremely valuable to key buyers.
• Unique Products and/or Services – You are so close to your business, running it daily, you may overlook how unique your service or product is. In the hands of a larger player, with capital to advertise and market this fact, your company could grow dramatically. Key buyers who recognize this will pay more for this off-balance sheet asset.
• Location, Location, Location – This old saying isn’t applicable only to retailers. You may be located in a part of the country that another industry player may want to enter. In a case like this, having an established organization where you are will be very attractive to many buyers located far from your business.
• Equipment – This may have intangible value to certain buyers. Chances are good that if you are in a capital-intensive industry, the value of your equipment has been fully depreciated. However, if you are like most middle-market manufacturing entities, you have probably customized your equipment to make it function better and/or produce more. If so, to certain buyers, having access to this customized equipment could be very valuable.
• Proprietary Lists — Proprietary lists can include customer or client lists, patent lists or even mailing lists, whether they are made up of customers or prospects. Lists can be especially valuable to a business if the relationships they represent are ongoing. Consider, for example, a magazine’s list of advertisers. The magazine may get 75% of its advertising revenue from the companies on that list. Therefore, the list is critical to the magazine's future profitability.
• Beneficial Contracts — Long-term contracts can add value to a company. For instance, a company may have a contract that allows it to sell its product or service for a higher-than-normal markup. Or it may have a contract that allows it to purchase or lease items at a below-market rate.
• Patents & Applications for Patents — How much the patents are worth depends on the strength of the patent claim (which can be difficult to determine if the patent hasn’t withstood litigation) and the patent’s economic and legal life.
• Copyrights — Copyrights are trickier to value than patents because, while they may have a long legal life, their practical value may only last for a short period. This is especially true for technical works that become dated quickly. The value of a copyright also depends on the author’s previous success.
• Trademarks and Brand Names — If a brand name or trademark lets a company sell its products for a higher price or in greater quantity than its competition, it has value.
• Subscriptions and Service Contracts — Subscriptions are especially important for newspapers, magazines, and cable companies because a large portion of their revenues is based on subscriptions. With both subscriptions and service contracts, the longer they have been in effect, the more they are worth.
• Franchise Agreements — Franchises with long track records and well-recognized names have significant value over newer, less known franchises. This is especially true in some industries (such as the hotel industry) that are dominated by franchises.
• Software — Many companies have developed proprietary software specific to their businesses. If this software provides efficiencies and benefits that the business wouldn’t have without the software, it is a separate asset.
• Goodwill — Goodwill means many things to many people, but generally it refers to intangibles like reputation, brand name, and location that lead to repeat business.

This is just a partial list I created a long time ago to help deal makers think about what could be intangible yet very attractive to specific types of buyers.

Here is the key: You need to determine what features of your business various types of buyers will find attractive and then market these features.

If you are working with an M&A advisory firm like Generational Equity, they will do this for you as part of their post-evaluation, pre-marketing due diligence. Please note that our deal makers are skilled in making sure your company’s intangibles are clear to buyers. Also note that the value of your business may be much higher to specific buyers because of your intangibles. Again, a skilled deal maker will know which buyers to approach regarding your off-balance sheet assets that would be attractive.

Intangible Assets in Action

A perfect example of a business owner receiving more because of his intangible assets is a deal (or actually two deals) that we closed last year. We were aggressively marketing our client, Johnston Enterprises, and were disappointed that the offers we were getting were nowhere near what the client wanted.

We then broke the company into two parts: Johnston Ports and Johnston Grains and ended up getting a substantially higher total dollar amount. Why? Because the buyers of the two entities ultimately saw value in the intangibles of each but did not want both for strategic reasons. 

The point is our deal makers working for Johnston had the experience and skill set needed to recognize how the intangibles of the individual entities were actually greater than the sum of the larger company.

You need to step back and look at your company as well before you approach the market. What features will buyers find attractive that your business has off the balance sheet? Take some time to ponder this question because it will pay off in the long run.

Carl Doerksen is the Director of Corporate Development at Generational Equity.

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