Can Business Value Management be Enhance by Intangible Assets?
When making a business value management for a company, it is important to know all its assets and liabilities to see it’s profitable enough to put money in it. Mostly, investors check on tangible assets. But they overlook intangible assets often. Management is in charge of effective application of all assets and how to value business assets under its control, yet very few companies have a good grasp on how to create value in a business using their intangible asset portfolio.
The books of accounting treat tangible assets in detail but provide limited or no information about intangibles. Whatever the case, these may represent the greatest value for the company and the greatest source of potential growth and profits. Strong sustainable intangible assets help give a company superior pricing power that can deliver high gross margins and recurring revenue. This, in turn, leads to robust profits and strong free cash flow – and a greater distribution of wealth to shareholders.
Tangibles assets are those which generally determine a company’s value. The plant and machinery, equipment, land and buildings and inventory measured and used to calculate return on investment. And how to value your business to sell. These assets are solid, and so the financial decisions are based on the importance of core values in business.
Value-based Pricing in Business Value Management
In the present economy, the most valuable assets have changed from solid to soft and from tangible to intangible. Instead of operational plants and machinery, companies today compete on ideas, IP and relationships. Having well-established brands are not enough anymore. You also need products that customers need to solve real problems and a business value proposition example that can demonstrate value based on customer perception. Hence, value-based pricing is essential to the valuation of both valuable tangible and intangible assets – and the ongoing growth of your business.
The creation and maintenance of brands, how does branding add value to a business, and understanding product and customer life cycle are becoming more relevant in today’s intensely competitive environment. A strong brand can be an invaluable asset for a company. Through the branding process, brand managers create recognition and can enhance purchase power to their customers.
Intangible assets are non-physical assets of the company. Not measured in conventional accounting terms. Such assets impact a company’s value and some like to categorise intangible value as brand equity, customers, copyrights, human resources, reputation of the company, supply chain reliability, and research and development made by the company.
The advantage of intangible assets is they’re much more difficult to imitate than tangible assets. Intangible assets deeply ingrained to the company. Or equally, if you have a network or platform that everyone’s using, it’s very difficult to break into that.
Another advantage is you don’t need to purchase physical assets to increase profits. So the high returns on capital means the cashflow in earnings increases.
Three factors to valuing intangible assets for business value management:
- Quantitative factors – these include financial standards that help determine whether the intangibles are currently producing revenue.
- Qualitative features – assess the strength of the intangible assets
- Contextual factors – does anyone want these intangibles and if so, how much are they willing to pay? Or what do our marketing teams need to do to educate future and existing customers on why they need to buy these products? Is there a real need there or are you really flogging an intangible dead horse?
There’s really no simple way to gauge the value of intangible assets. But these three factors taken into consideration in valuing them.
Example of companies with intangible assets:
- Technology companies with computer companies, copyrights, patents, IT employees, and research and development. They create the applications that program the computers and sell them to the public.
- Entertainment and media companies have publishing rights and essential talent personnel making music and writing stories for the shows.
- Consumer products and services companies have formulas and recipes, along with brand name recognition in highly competitive markets. A good example is Coca-Cola, soda drinks is synonymous with it.
- The healthcare industry tends to have brand names, skilled medical professionals, research and development of medicines and techniques in caring patients.
- The automobile industry has engine technologies. Closely guarded secrets are Alternative fuel source engines and electric-powered cars. Also, brand names like “Corvette” and “Ferrari” are worth billions.
Other examples of intangible assets to determine business value management
Another special type of intangible asset is goodwill. Or a portion of the entire business’ value that cannot be attributed to other income-producing business assets.
An example of which is a fast-growing software company. It has net assets (consisting primarily of equipment and/or property, and no liabilities) of $1 million. But the company’s overall value (including customers and intellectual capital) priced at $10 million. Anyone who wants to buy that company will purchase it for $10 million. Any excess of that $10 million is considered goodwill.
In a private company, goodwill has no predetermined value prior to an acquisition whereas a publicly-traded company is subject to a constant process of market valuation, so goodwill will always be apparent.
- Market value comes from expectations about a company’s future cash flow, which comes in large part from intangibles such as research and development efforts, patents and good old workforce “know-how”.
- It nevertheless pays for investors to try to get an understanding of intangibles. Much accounting research is devoted to coming up with ways of valuing them and techniques are improving. However, they are not really hitting the mark with their valuations and in many ways underselling businesses. Most pricing professionals should get into this area – and private equity should be looking at pricing to leverage the resale value of the businesses they acquire.
- Even though intangible assets do not add any physical value to companies compared to equipment or factories, they are very valuable to the long-term success of companies and should not be disregarded as easily as they seem to be.
- While intangible assets don’t have the obvious physical value of a factory or equipment, they are still significant and carry huge profit potential if they are valued correctly. In fact, they can prove very valuable for a firm and can be a major factor in its long-term success or failure.
- Intangible assets strengthen a business’ pricing power because they are much harder to imitate and offer greater potential for higher returns on capital.
- Investing in pricing, product development and marketing can have a positive impact on the total economic value of your business and the company’s overall viability.
- Finance managers should always realise the need for managing intangible assets. Not only at the time of a crisis but when the business and economy is strong.
- Realising that intangible assets are untapped source help you get the ROI from a business. Once you have bought or want to sell.
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