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Intangible Assets and Your Company

By Generational Equity

10/31/2011

Have you ever wondered why two companies in the same industry with similar financials and growth projections can be valued completely differently? What makes a buyer pay a premium for Company A while not paying a premium for Company B? Why can two buyers look at the same company and come up with valuations that are widely divergent? Aren’t both buyers essentially using the same projected financials to determine the “worth” of a potential investment? The answer to all of these questions can be summed up in two words: intangible assets.

The official definition of intangible assets is found below:

The assets of a business that have value but are nonphysical and not shown on the balance sheet

Intangible assets (also known at “off balance sheet” assets) are those items that essentially make your business unique. Their relative value will vary from buyer to buyer. As part of your evaluation process, it is vital that you do a complete analysis of what sets your company apart from other companies in your industry.

Quite often, identifying intangible assets is a very difficult process for a business owner to accomplish. We find that because business owners are so close to their companies, they often take what makes them unique for granted. Or they simply don’t have the time to adequately brainstorm a full list of intangible assets.

A Sample List

To help you out, we have compiled a sample checklist that you can use for your company. This list is designed specifically to focus on intangible assets for manufacturing enterprises. However, many of these apply to any business regardless of its focus. Use this list to help you brainstorm your company’s specific intangibles. (Note: This is simply a sampling of possible intangibles.)

Checklist of Possible Intangibles

    • Backlog: Does your company have expected revenue streams based on booked orders?
    • Contracts: Does your company have any short- or long-term contracts with existing clients (in writing)? 
    • Customer List: Is the buyer purchasing a blue-chip customer list when he acquires your company?
    • Employee Manuals: Have you created and established training and development program for both new and existing employees?
    • Established Staff: Does your company have an employee base of long-term, tenured personnel?
    • Growth Potential: Is the buyer acquiring a business with above-average growth potential? If so, why? Document this point in detail.
    • Internet Presence: Does your business have a well designed website and solid web recognition?
    • Management: Will the buyer be purchasing an established management team that is not dependent on the owner? This is possibly the most critical strength (or weakness) you can document.
    • Profitability: Is your business more profitable than industry norms? If so, why?
    • Skilled Employees: Do you have any employees that have earned industry recognition? Do not include yourself in this analysis. 
    • Solid Supplier Base: Does your business have a base of established, mixed, dependable suppliers? Note: This will not be the case if you only have one supplier.

By no means is this list exhaustive. Nor does it cover all the possible permutations and intangibles that your company may have. If you are attempting to market your company on your own, we would strongly suggest that you set aside three to four hours to meet with your trusted advisors who can help you brainstorm on this topic. This step is so vital that we cannot stress it enough. 

When you develop your list of specific buyer types, you will base whom you approach on these intangibles. Again, each buyer will value what you do differently. If you do your homework and clearly document what makes you unique, your odds of finding a buyer willing to pay a premium for your business go up dramatically.

If you are fortunate enough to be using an M&A advisor, they will do most of this work for you. They will have the experience needed to ask you key questions in order to really get to know your business and to delve into areas that you may take for granted. If you would like to learn more about how the Generational Equity evaluation process works, please contact us for a free, no-obligation consultation. If you qualify, you will be invited to attend one of our M&A workshops that we hold around the country on a weekly basis. While at a workshop, you will learn more about the value of intangibles and how they can be used to find the optimal buyer for your business.

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