Understanding the items that make up the value of your business
The intangible assets of a business can often make up more than 60% of the total value of that business. However, the nature of intangible assets are frequently badly understood. In this article, we highlight the discrete items or classes of intangible assets that, together with the tangible assets, make up the value of a business or company. By familiarising themselves with the make-up of intangible assets, managers can put themselves in a better position to maximise its value.
Intangible assets can be broadly divided into opportunistic – type factors that add to the value of a company, as well as intellectual assets. Opportunistic – type factors can include items such as lucrative ongoing contracts, the location of a business, a change in regulations or law or that suits a business. Intellectual assets are discussed in more detail below.
Intellectual assets can broadly be divided into “human capital” and “intellectual property”. Human capital is the value that is added on a day-to-day basis by employees, management and directors by bringing their individual skills, ideas and talent to bear. However, human capital can be viewed as a transient value that leaves with that person when they leave the business.
Of a more permanent and sustainable nature is the intellectual property. Intellectual property is what happens when the skills, talent and ideas of the people of the business are reduced to material form.
Intellectual property includes the more well-known forms of statutorily regulated intellectual property, such as patents, registered designs, trademarks and copyright. However, also included under the definition of intellectual property are other items such as trade secrets, know-how and confidential information.
Trade secrets, know-how and confidential information can include things like processes and systems that have been developed that allow a company to perform at greater efficiencies, to transition seamlessly between leaving employees and new employees, and to ensure consistency in delivery of quality or value.
Trade secrets, know-how and confidential information can further be classified into two groupings: a positive knowledge base and a negative knowledge base. A positive knowledge base is that knowledge that has been developed which positively affects that businesses goods or services, while a negative knowledge base is knowledge that has been developed which is known to negatively affect goods or services.
In some cases, the formalisation of a negative knowledge base can be nearly as valuable as a positive knowledge base. At the very least, the value of a negative knowledge base is worth the value of the time, effort and cost required to establish what doesn’t work.
By understanding the nature of the items that make up the intangible value of a company, business owners can seek plan for and manage the optimisation and maximisation of this value. Also, in the case of mergers and acquisitions, understanding the nature and value of what is being transferred can be invaluable. As an example, if the main value of a company lies in its human capital, but the employees are not being transferred as part of a business acquisition, this can affect the value of the deal severely.
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