As an entrepreneur, you understand better than anyone else that crafting a successful business requires carefully considering many factors, including the potential valuation of all your assets. At first glance, this seems straightforward because you can easily calculate the value of assets like property, equipment, and inventory. These are tangible assets because they have a clear, quantifiable value.
Intangible assets, meanwhile, are not physical in nature, and defining their value is much more complicated. This article explores intangible assets, why they matter, and how you can calculate and maximize their value.
What are intangible assets?
Intangible assets lack a physical structure or substance but provide value to a company. Some of the most common and valuable intangible assets are intellectual property, contracts, licenses, brand recognition and reputation, organizational goodwill, and even customer relationships. Depending on the industry, you may also have other types of intangible assets that your business deals in, but we will focus on the most common types here.
Difference between intangible and tangible assets
The most significant difference between the two is that tangible assets exist physically, while intangible assets remain unseen. In general, tangible assets are much easier to value without deep investigation, while intangible assets require more study, research, and analysis.
Tangible assets are essential to a company’s continued operations. However, intangible assets are gaining importance as business operations move toward a more digital model. Some speculate that intangible assets may soon outpace the value of tangible assets for many different companies.
As technology advances and evolves, businesses will place great importance on intellectual property, customer relationships and loyalty, and overall brand reputation.
Importance of intangible assets in today’s business landscape
Intangible assets are a crucial component of competitive advantage and significantly impact a company’s overall value. For example, a solid brand is tied to higher sales and enhanced customer loyalty. A loyal customer base can provide steady revenue and growth through word-of-mouth marketing.
Meanwhile, intellectual property (IP) licenses prevent others from using inventions, designs, products, or ideas without express permission from a company. IP licenses, therefore, provide a company with an edge against competitors in the same space.
Understanding the value of tangible and intangible assets is vital for anyone hoping to create a successful business in the current business landscape. Effective valuation and management of those assets are also crucial for any business looking to reach its financial goals.
Types of intangible assets
There are five common types of intangible assets that entrepreneurs should be aware of :
- Intellectual property
- Brand recognition and reputation
- Goodwill
- Customer relationships
- Contracts & licenses.
Next – we will look at each one in detail and explore what they are and why they are important.
Intellectual property
Intellectual property refers to creations of the mind. This covers everything from inventions to artistic or literary works, names, images, and even symbols used in business or commerce. Certain types of intellectual property (such as patents, trademarks, and copyrights) can provide a significant competitive advantage for a company while protecting its innovations and ideas.
Copyrights protect originally authored works, including music, books, and software. Patents grant exclusive rights and protection for a specified period to an invention, preventing others from using, making, or selling without the patent holder’s permission. Trademarks safeguard a company’s brand and reputation by prohibiting others from using a too-similar name, logo, or design.
Maximizing intellectual property’s value requires entrepreneurs to apply for patents, trademarks, and copyrights as early as possible. It’s also vital for a business to conduct regular searches to ensure no one is using their intellectual property.
Brand recognition and reputation
Brand recognition and reputation pertain to the level of consumer awareness and perception of a brand or company. Building a memorable brand is one of the most crucial tasks for any business, as it can result in increased sales, heightened customer loyalty, and a significant competitive edge. In addition, having a solid brand reputation can help companies weather crises or negative publicity with greater resilience
The components of brand recognition differ across businesses. Still, some fundamental elements include a distinctive and recognizable logo, uniform messaging, visual branding across multiple channels, substantial customer engagement, and organic and paid online traffic.
Goodwill
A company’s goodwill is a combination of the value that its reputation, customer base, and similar intangible factors add to its overall value. Goodwill can be significant during mergers and acquisitions, as sellers can use goodwill to leverage a much higher purchase price. Some of the most effective strategies for building and maintaining goodwill include providing top-tier customer service, supporting and giving back to the community, and having a strong ethical reputation.
To maximize the level and value of goodwill, entrepreneurs should focus on building and maintaining solid relationships with customers, employees, and stakeholders. You can accomplish this by investing in employee training and development, supporting local charities, participating in community events, and establishing an overall culture of transparency in the business.
Customer relationship
The customer relationships a business cultivates and develops are another valuable intangible asset. Strengthening customer relationships is vital for entrepreneurs because it increases sales, enhances customer loyalty, and improves marketing efforts. Businesses should closely monitor customer satisfaction using metrics from customer satisfaction surveys, customer retention rates, and customer lifetime value.
Developing and maintaining strong customer relationships requires entrepreneurs to offer the best customer experience possible. A cornerstone is excellent customer service, but the customer experience should also include rapid response to inquiries and concerns and personalized service and support. You can augment your customer experience efforts with regular communication via email newsletters and social media outreach
Contracts and Licenses
Contracts and licenses are common types of agreements that give a company the rights or permissions to use a specific asset or technology. Entrepreneurs should be aware of all of the different types of contracts and licenses, such as exclusive and non-exclusive agreements, and consider the potential risks and benefits of each.
Contracts and licenses can be one of the most challenging intangible assets to obtain because they nearly always involve delicate negotiations. Businesses can use negotiations to arrange lower fees, get longer contract terms, or even receive exclusive access to a particular technology or asset. Carefully managing the contracts and licenses for a business will involve keeping track of critical deadlines and ensuring that all contract obligations are adhered to or otherwise fulfilled.
Identifiable and Unidentifiable Intangible Assets
In addition to the various types of intangible assets that we discussed above, it’s essential for entrepreneurs also to understand the difference between identifiable and unidentifiable intangible assets. Identifiable intangible assets can be separated from a company and subsequently sold like company trademarks or patents. Unidentifiable intangible assets are those you cannot separate from the company, such as overall culture or specific management expertise.
Understanding the value and importance of intangible assets is critical for entrepreneurs that are focused on success in the current business landscape. Though tangible assets are much easier to quantify, intangible assets provide a unique and competitive advantage for a company and provide a significant boost to the company’s overall value. With careful management and valuation of intangible assets, an entrepreneur’s chances of attaining success are much higher.
How to calculate the value of intangible assets
While you can value tangible assets based on their respective market price, intangible assets can be far more difficult to fairly and accurately value. That said, there are a few different methods you can use to calculate the potential value of an intangible asset. Below are the four most common.
Cost Method
The cost method for calculating the value of intangible assets involves calculating the cost of creating or acquiring the intangible asset. This cost method can include various expenses related to the asset, including research and development costs, legal fees for obtaining patents or trademarks, or licensing fees for using a specific technology. One of the limitations of the cost method is that it only considers the value of the development and maintenance costs for the asset, not the market demand, or perceived value due to brand reputation.
Replacement Cost Method
The replacement cost method estimates the cost of creating or acquiring a similar intangible asset. This can include researching the development cost for a similar product or brand or estimating the cost of licensing a similar technology. This is another valuation method that does not allow for the value of potential market demand or brand reputation. In some cases where cost value was not calculated initially, the replacement cost method may be the only way for a potential value to be determined.
Market Method
The market method for valuation consists of comparing the value of the intangible asset to similar assets that have recently sold in the marketplace. This can include researching and analyzing recent mergers and acquisitions or even reviewing the sale of similar trademarks or patents, which is one of the biggest challenges to this method. This is a considerable challenge in some cases because finding a comparable asset can be difficult, even more so for particularly unique or innovative intangible assets.
Income Method
The income method for calculating the value of an intangible asset is the most open-ended because it involves estimating the future income that a particular intangible asset will generate. This can include projected earnings from various contracting, licensing, or franchising agreements. It can also consist of the expected or projected revenue from a specific patented product or trademarked brand. Valuing an intangible asset with the income method can be challenging since it requires a detailed understanding of the market and industry, combined with highly accurate revenue and expense predictions for the period over which the asset is valued.
Conclusion
Entrepreneurs who have started or are planning to start their own businesses must prioritize the value of intangible assets. By comprehending the various categories of intangible assets, recognizing their profound worth, and finding ways to maximize their value, entrepreneurs can make informed decisions for their businesses and gain a competitive advantage in their industry. Armed with this edge, entrepreneurs can build a robust and flourishing business that is better equipped to thrive in the constantly evolving business landscape.