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Invaluable Intangible Assets

While pricing your business for sale, intangible assets can be even more important than tangible property.

Tags: Invaluable Intangible Assets

BY Entrepreneur  |  Apr 02, 2010 comments ( 0 ) |

Customer awareness and a prominent position within the marketplace are key ingredients to the success of any business, both small and large. The value of intangible assets, such as knowledge, relationships and intellectual property, constitute a greater proportion of the total value of most businesses than is the value of tangible assets, such as machinery and equipment. And the creation and management of intangible assets are often essential for long-term success.

 

A strong brand and a loyal customer base can be distinct assets owned by a business or simply part of a business's goodwill. Examples of distinct intangible assets include copyrights or trademarks that let a business sell its products for a higher price or in greater quantity than its competition, proprietary mailing lists of customers or prospects, long-term contracts, and franchises with long track records and well-recognised names. Rahul Jain, CEO, Business Coaching India, says, “Goodwill is defined as the value of the business in excess of its owner's equity; examples include a favourable location and community awareness.”

 

Most business owners do not have an adequate understanding of how their brand and customer bases impact the value of their businesses. In valuing your loyal customer base, it's important to remember the 80/20 rule-of-thumb; 20 per cent of your customers most likely produce 80 per cent of your profits. Rule-of-thumb formulas do exist in some industries, but a better estimate of value is gained through a more in-depth analysis. Brands can be valued using three traditional valuation approaches: cost, market and income.

  • The cost (or cost of creation) approach relies on calculating what it would cost another business to duplicate a given asset today. This can be done using estimation of current costs or by calculating the present value of all historical expenses of creating the brand.
  • The market approach focuses on past sale transactions of brand names. As expected, finding good data to use as a comparison is very difficult. However, if you're able to identify a brand that's comparable to your brand name and use it as a proxy, the market-based valuation analysis is quite reliable.
  • The income method measures the future benefits (such as sales, profits or cost savings) that the intangible asset will bring to a business, the timing of the receipt of those benefits and the length of time that the business will receive those benefits. Generally, a combination of a discounted cash-flow model and an excess earnings method is used to establish value under the income approach. A variation of this approach is to calculate and capitalise the profits generated by your business with the strong brand name that are in excess of a similar ‘unbranded’ business.

 

Generally, the best method to valuing a customer base is to segment your customers into categories based on characteristics that drive profitability. For example, frequency and value of purchases or longevity of relationship may be pertinent factors. This information will prove useful not only in calculating a value for your customers, but also in focusing your sales efforts on your most profitable customers.

 

A useful, though less-scientific, way to combine the analysis of your brand and your customers is to consider customers' awareness, loyalty and quality perception of your brand. Perceived quality has the strongest linkage to strong profitability, usually because quality brands can demand a price premium.

 

Customers' loyalty in purchasing is the number one value-creating factor in brand valuation because it results in an even and predictable revenue stream. Loyalty can also be further categorised into non-customers, price-switchers, passively loyal, fence-sitters and committed customer groups.

 

In the end, brand recognition and customer loyalty are very important components of the value of your business. “The realisation of this value is through increased earnings that are received steadily over a period of time. You must understand this value, manage it in your business and convey that understanding to potential buyers,” says Vikram Bakshi, MD, McDonalds- North & East. The better you perform these tasks, the higher a premium you'll receive for these intangible assets upon selling the business.

 

 

 

Customer awareness and a prominent position within the marketplace are key ingredients to the success of any business, both small and large. The value of intangible assets, such as knowledge, relationships and intellectual property, constitute a greater proportion of the total value of most businesses than is the value of tangible assets, such as machinery and equipment. And the creation and management of intangible assets are often essential for long-term success. 

A strong brand and a loyal customer base can be distinct assets owned by a business or simply part of a business's goodwill. Examples of distinct intangible assets include copyrights or trademarks that let a business sell its products for a higher price or in greater quantity than its competition, proprietary mailing lists of customers or prospects, long-term contracts, and franchises with long track records and well-recognised names. Rahul Jain, CEO, Business Coaching India, says, “Goodwill is defined as the value of the business in excess of its owner's equity; examples include a favourable location and community awareness.”

Most business owners do not have an adequate understanding of how their brand and customer bases impact the value of their businesses. In valuing your loyal customer base, it's important to remember the 80/20 rule-of-thumb; 20 per cent of your customers most likely produce 80 per cent of your profits. Rule-of-thumb formulas do exist in some industries, but a better estimate of value is gained through a more in-depth analysis. Brands can be valued using three traditional valuation approaches: cost, market and income.

  • The cost (or cost of creation) approach relies on calculating what it would cost another business to duplicate a given asset today. This can be done using estimation of current costs or by calculating the present value of all historical expenses of creating the brand.
  • The market approach focuses on past sale transactions of brand names. As expected, finding good data to use as a comparison is very difficult. However, if you're able to identify a brand that's comparable to your brand name and use it as a proxy, the market-based valuation analysis is quite reliable.
  • The income method measures the future benefits (such as sales, profits or cost savings) that the intangible asset will bring to a business, the timing of the receipt of those benefits and the length of time that the business will receive those benefits. Generally, a combination of a discounted cash-flow model and an excess earnings method is used to establish value under the income approach. A variation of this approach is to calculate and capitalise the profits generated by your business with the strong brand name that are in excess of a similar ‘unbranded’ business.

Generally, the best method to valuing a customer base is to segment your customers into categories based on characteristics that drive profitability. For example, frequency and value of purchases or longevity of relationship may be pertinent factors. This information will prove useful not only in calculating a value for your customers, but also in focusing your sales efforts on your most profitable customers.

A useful, though less-scientific, way to combine the analysis of your brand and your customers is to consider customers' awareness, loyalty and quality perception of your brand. Perceived quality has the strongest linkage to strong profitability, usually because quality brands can demand a price premium.

Customers' loyalty in purchasing is the number one value-creating factor in brand valuation because it results in an even and predictable revenue stream. Loyalty can also be further categorised into non-customers, price-switchers, passively loyal, fence-sitters and committed customer groups.

In the end, brand recognition and customer loyalty are very important components of the value of your business. “The realisation of this value is through increased earnings that are received steadily over a period of time. You must understand this value, manage it in your business and convey that understanding to potential buyers,” says Vikram Bakshi, MD, McDonalds- North & East. The better you perform these tasks, the higher a premium you'll receive for these intangible assets upon selling the business.

 

 

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