Intangible Valuation of a Company

New approach to the valuation of companies

Investments in intangible assets underpin the knowledge or learning economy.

These investments, such as intellectual property (IP), research, technology and software, and human capital, have increased inexorably over the past 25 years. And the COVID-19 pandemic seems to have accelerated this trend.

Towards a dematerialized approach to business valuation.

Are we witnessing the beginning of a new stage in the history of capitalism based on learning, knowledge and intellectual capital?

Will the intangible valuation of companies take over from purely financial valuation methods in the world?

Intangible assets are becoming more and more essential to the valuation of a company.

However, current accounting standards make it difficult to take them into account in financial statements.

This lack of consideration can adversely affect the valuation of a company.

Valuations based on simple accounting measures from the financial statements (balance sheets and accounts) of companies are no longer sufficient.

Internally developed intangible assets tend not to appear on the balance sheet and the related costs are expensed as incurred.

Under IFRS, these assets are only recognized if certain criteria are met.

The accounting treatment differs according to the type of asset:

• tangible assets benefit from accounting measures of depreciation and amortization
• internally developed intangible assets do not benefit from standardized accounting measures and create valuation problems.

As investments in intangible assets increase, assessing the value of these assets as a component of enterprise value becomes increasingly critical.

Discrimination between the assets of companies in accounting terms

A company that has developed its portfolio of intangible assets through acquisition will probably have a higher proportion of intangible assets on its balance sheet (and more goodwill) than a company that has developed intangible assets internally.

This will affect the balance sheet ratios and reported earnings but also the value of the company.

The valuation of intangible assets is highly subjective.

To complicate matters, entrepreneurs tend to overestimate the value of their company’s intangible assets.

Intangible assets can be the defining element of your company’s value and even the secret weapon for which a buyer will accept a very high price.

But getting the value of these types of assets accepted is often the biggest stumbling block in selling a business.

Here are some tips on understanding intangible assets and how they might be valued.

1. Understand what an intangible asset is

An intangible asset is an asset that has no physical form and is not monetary.

The main intangible assets are intellectual property, brands, trademarks, customer lists and, in some cases, non-competition agreements.

Sometimes these assets can all be grouped together as “goodwill”, but they are actually separate and distinct.

Generally, they do not appear on a company’s balance sheet when a company acquires another company or if a specific intangible asset is acquired separately.

2. Understanding the process

During a business transfer, Actoria normally establishes a valuation for the whole company, including the value of intangible assets.