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Is the Impact of Intangible Assets on Valuation Understood?

Nigel Hartley
Is the Impact of Intangible Assets on Valuation Understood?

Baby Boomers grew up in an economy of making stuff, where manufacturing was king but over the last 50 years that has been eroded and today when looking at a business we have to increasingly look under the hood to see what are the ‘Intangible Assets’. In the uncertain and ever changing world of the 21st Century, business’ need to be aware of these assets as they play a critical part in how investors view and value businesses.

What are ‘Intangible Assets’?

Those things that increase the value of a business but can’t be touched like IP, Goodwill, Brand and increasingly Culture as Millennials want to work with a company that has a purpose and a culture that reflects values like theirs.

Business owners, however, still discount this element of a business valuation, so I thought I would share the impact it has had on the stock market and in particular the S&P. Ocean Tomo, the intellectual capital merchant bank, has been tracking this for years and as you can see, from the graph below, as of 2015 it is now up to 87%. Their evidence points to this number now peaking and in fact declining slightly in the coming years but it is still a staggering change in our economy. Looking for a gauge as to what is happening in 2018 I took a look at a fund that used as a benchmark 'patent index performance' and it has outperformed the Dow and matched the Nasdaq for the last five years, so this theory still is true today.

  

Obviously, in privately held mid-market where most of our clients are the percentages would be less, but it is an increasing factor.  Let’s take culture as an example which sometimes gets dismissed as touchy but in fact nothing could be farther from the truth. Confirmation of the importance of culture can be seen in the fact that since 2009, a portfolio of Fortune’s 'Best Companies to Work For' outperformed the S&P 500 by 84.2%.

What is your exit strategy? Do you even have an exit/transition strategy?

Either way 'Intangible Assets' are here to stay, and you are encouraged to nurture and protect yours!

Nigel Hartley is a Business Advisor with Shirlaws Group. You can contact Nigel on +707 573 7154 or email nigel.hartley@shirlawsgroup.com 

Nigel Hartley