Intangible assets are non-material and cannot be physically handled. Examples of intangible assets are goodwill, brand recognition, customer lists, copyrights, and trademarks. An intangible asset can be considered indefinite (a brand name, for example) or definite (e.g., a legal agreement or contract).
Whereas tangible assets (such as real property, vehicles, and equipment) are quantifiable and generate revenue, intangible assets do not, which makes it difficult to assess and value them.
While tangible assets are distinguishable from intangible assets, both will often be included in a transaction between parties. For example, if a business is sold, the buyer will receive both the physical, tangible assets, such as equipment and intangible assets, such as brand recognition and customer lists.
Intangible assets can contribute greatly to a company’s market success and help increase its profitability, but Intangible assets created by a company do not appear on the balance sheet and have no recorded book value. They are considered a premium that a buyer may be willing to pay for as part of an acquisition.
What is Brand Name Recognition?
A brand is something that sets one business apart from another. This may come in the form of a logo, symbol, or brand name. Businesses invest time and effort into developing a brand and use marketing, design techniques, and advertising to come up with their brands.
Brand recognition is the degree and ease to which the public can identify a company or product by viewing its logo. This can be of considerable value for someone who wants to buy a company with great brand recognition. Major companies like M&M’s, Ben & Jerry’s, and Coca-Cola have great brand recognition because consumers readily know what products or services they can get from these companies.
Brands are important because they help keep customers loyal. Some consumers may choose to pay more for one company’s product out of loyalty, even if it is priced higher than a similar product offered by a competitor. Coca-Cola and Pepsi are products with superior brand recognition, and many customers are fiercely loyal to their favorite products.
What is Goodwill?
Like brand recognition, goodwill can add significantly to the company’s success and affect its market value. Goodwill combines intangible assets like good employee relations or good customer relations.
For example, Fast Food Company A has been the leading fried chicken fast food chain for more than twenty-five years. Company A is known for friendly service and reliably tasty food.
Recently, a problem with the chicken supplier, resulted in several customers getting sick after eating at the restaurants. If this happened to a company with less goodwill, the company might have gone out of business. However, Company A’s long-time goodwill allowed Company A to keep its restaurants open and maintain its customer base.
Why are Trademarks Valuable?
A trademark is a word, design, or phrase that lets consumers identify the provider of one product versus another. Examples of trademarks are the golden arches for Mcdonald’s and the bullseye for Target. When a franchisee purchases a Mcdonald’s, they know those golden arches are so recognizable that they will not have to spend much money at all on advertising and that customers will turn off the highway to eat once they see a set of arches.
What Else Can Be Considered Intangible Assets?
Trade secrets and other proprietary information may be considered intangible assets. For example, a secret recipe or soda formula that helps to make a product’s signature taste may be considered an intangible asset. Successful companies spend much effort to protect their trade secrets. A company that takes its secrets seriously and guards them against any possible disclosure is worth more than a company that does not recognize the importance of protecting them.
Sales, supplier, and employment contracts can also be considered intangible assets. A company is worth more if it has sales lined up via contract; that is, buyers waiting to receive the product. This keeps the company from acquiring a lot of overstock. A company is also worth more if it has strong relationships with its suppliers – this makes it less likely that the company will run out of the supplies it needs to keep the company going.
Finally, employment contracts can be very important. A company with lucrative employment contracts with some of the world’s top engineering scientists, who are responsible for designing a software product that has made the company a leader in the industry, is worth a good deal of money.
How Do I Value My Intangible Assets?
Valuing intangible assets is a skill, not a hard science, and can be overvalued if left entirely to a company’s owner or undervalued by a prospective buyer. When valuing an intangible asset, you ultimately are asking what a buyer is willing to pay for it and how it adds to the company’s economic value.
Thankfully, there are experts who specialize in translating the value of intangible assets into money. When looking for the right assessor, it is important to do your own research. Get recommendations from friends, get quotes for the price of the evaluation, and speak to references the assessor provides to you.
In establishing a value for the intangible asset, the expert will look at what type of intangible asset it is. They will also look at the income generated by the business, forecast future revenues, and examine market risks.
When valuing the intangible asset, the expert will do their own research. This will entail looking at the company’s overall earnings, growth prospects, market conditions, and comparable sales. They will look at what it cost to develop the asset historically and what it will take to develop it now. The valuator will set the entire company’s value and distill the remaining intangible assets.
There are generally three ways that businesses can value their intangible assets, according to the American Institute of Certified Public Accountants. They are the:
- Market Approach: This valuation methodology relies on an expected value based on a relative analysis. It focuses on placing a value on similar intangible assets that other companies (often competitors) hold. It may prove difficult because of the limited details available about similar assets held by other companies.
- Income Approach: Companies can use this method when their intangible assets have a cash flow stream. Some income approaches include the analysis of the royalty method, which estimates possible royalty payments derived from the use of the asset.
- Cost Approach: This method relies on the idea of substitution and doesn’t account for any future benefits based on time or amount.
From their research, the expert will determine the best valuation approach to utilize from their research.
Should I Seek Legal Advice If I Have Concerns with an Intangible Asset?
Valuing intangible assets can be incredibly difficult without the help of experts. An expert well-versed in your specific type of asset is a great place to start. While intangible assets often add value to an overall sale, they can also increase the price and be the source of business disputes.
A business attorney can help you negotiate these matters to ensure that your sale or purchase of a business accurately reflects what you desire. Most important, whether you are buying or selling, an attorney can help you figure out how much a company is worth so that you receive or pay the right amount of money.