Intangible Assets: What They Are and How They Can Add Value to Your Business
The value of a business is made up of 2 items, tangible value and intangible value. Tangible assets are just that, tangible items like Inventory, FF&E, Vehicles, or anything that is used to develop a product or services that a company sells. What’s left is intangible. These intangible assets can boost your business value, and once you understand how, your next business valuation will be a pleasant surprise, rather than an ice-cold reality check.
What are Intangible Assets?
Intangible assets are, simply put, the long-term assets of a company that do not have any tangible existence. Intangible assets often come in the forms of copyrights, goodwill, non-compete agreements, patents, etc. Of the 31.5 million businesses currently in the United States, most fail to realize the value of their intangible assets.
Trademarks:
A trademark is any symbol, name, mark, word, or letter used by a company to differentiate one from another within the market. It provides visual differentiation from other companies on the market and can play a role in increasing a business’s value if it’s widely known and respected by consumers.
Copyrights:
Copyrights grant a company the right to design, manufacture, and sell its unique products or services. For example, if you create any intellectual property related to your business, those items need to be copyrighted to ensure you have complete rights to them.
Employees:
Believe it or not, your employees play a vital role in the value of your business. They are another form of intangible assets, as their skills and knowledge play a major role in how well your company performs.
How Intangible Assets Affect the Value of Your Business
Certain types of intangible assets are more valuable than others. Intangible assets such as intellectual property, knowledge, and relationships often play an outsized role in contemporary businesses compared to traditional assets like equipment, machinery, and technology.
However, the development of these intangible assets is essential to the long-term life of a business. Of the 8.4 million firms with employees operating today, seven out of 10 new firms only survive about two years, and a big part of that is a lack of intangible assets.
Any business valuation firm will tell you that it’s important to keep track of all of your assets, both tangible and intangible. A business valuation will take all of those things and use them to maximize the value of your business. One thing to note here, intangible assets only have value if they generate cash flow. Since cash flow drives value, they are included in the final value, not in addition to it. The exception to this is when those intangible assets are attracting strategic buyers where the asset is what they want, not the business. That’s a different blog….
If you have questions about intangible assets or anything else related to business valuation: