Intangible Assets Create Goodwill

One usually thinks of intangible assets like trademarks and patents, often a corporation’s most significant and most valuable intangible assets. However, there are several other kinds of intangible assets, and they have a substantial impact on a company’s purchase price. Also, many of these less obvious intangible assets have a timeless and increasingly important dimension compared to traditional, tangible assets.

Reasons for Valuation

When purchasing or selling intangible assets, companies, or parts of companies for which intrinsic value is essentially based on intangible assets, valuation forms the basis for determining the purchase price between the parties involved. A distinction must be made between the valuation of the asset for transaction purposes within the framework of an ordinary course of business and the valuation assuming the company will be broken up (liquidation).

Valuations of intangible assets are also carried out within the framework of accounting and tax regulations.

The Auditor’s Function

The auditor can act as an independent expert, advisor, arbitrator, or auditor. As an independent expert, the auditor determines a common value for the intangible asset in question from the perspective of a third party. In the role of arbitrator, the auditor determines an agreement value in a conflict situation, taking into account the various subjective values of the parties involved.

In the auditor’s role, the auditor must understand whether an assessment procedure that corresponds to the reason for the assessment has been appropriately selected in the context of an assessment.

Valuation Methods

Market price-oriented procedure: This entails using market price as the basis or standard for valuating an asset following a specific valuation occasion. This works only if the market prices observed relate to sufficiently comparable assets and must derive from an active market. Since intangible assets are not regularly traded on active markets, similar transactions can be used to value an intangible asset. Using a method of analogy, a comparison is made between the observable price for a comparable object and the value sought for the intangible asset to be valued.

Capital value-oriented or net present method: This method is based on the assumption that the value of intangible assets results from their ability to generate future profit contributions in the form of cash flow. The value of an asset is the sum of the present value of the future realizable cash flows as of the valuation date, which is generated from the use of the intangible asset during the expected useful life and, if applicable, from its disposal. Therefore, the central tasks of the valuation are the forecast of the valuation-relevant cash flows and the derivation of the capitalization interest rate/cost of capital reflecting the risk of the intangible asset in question. Depending on the evaluation task, the cash flows are determined directly, or it is assumed that license fees are saved, or additional profit is achieved through the intangible asset.

Cost-oriented procedure: This valuing intangible asset includes the reproduction cost and the replacement cost. If the cost-oriented method is used, the costs necessary to produce an exact duplicate (reproduction cost) of the asset can be used as a basis. Alternatively, it is possible to use the costs for the production or procurement of a utility-equivalent asset (replacement cost). If necessary, deductions must be made to take account of economic, technical, and functional obsolescence.

Intangible Asset Categories: PR & Marketing

Accolades, publications, certifications: Some intangible assets are very complex and time-consuming to create the first time. They ensure differentiation in the competitive market. Almost all of these intangible assets require expenditures in registration or creation but are then permanent and always available. With some exceptions, there may be a time limit, or maintenance fees may apply. Nevertheless, once it’s complete, you can focus on other topics.

Examples of this type of intangible assets include:

  • High-quality and attractive company brochures
  • Books and e-books
  • Company manuals
  • ISO 9001 or other certifications
  • Prizes and awards
  • Newspaper articles and media clips about the company.

Evolutionary marketing assets: This category of intangible assets is characterized by a long lead time in creation and construction and is mainly used in marketing. Increasing price pressure, decreasing attention, the failure of traditional marketing, and growing network migration pose significant challenges for many companies in customer acquisition. That is why the demand for “inquiry magnets” and marketing instruments of all stripes is increasing. They ensure a clear differentiation in the market and customer perception. These intangible marketing assets build up over time and continue to grow in value. When selling a company, you should appropriately present these values that you have created.

Social media accounts: New media and marketing channels are spreading more and more, especially in consumer products. Facebook currently has over 1.5 billion users, which offers an enormous reach and, as it were, a “social recession” for new, trendy, and high-quality products and services. Accordingly, a Facebook account with 50,000 likes, for example, can represent great added value for any company. Facebook is only an example of all social media services, including Twitter, TikTok, WhatsApp, Parler, Clubhouse, LinkedIn, etc.

A specialist blog: Blogs consist of informative posts for site users that deliver valuable information and alert website visitors to media credits and other news about the company. However, most posts are mostly just for self-promotion. As an intangible asset, a blog must be a high-quality and established specialist portal in which your carefully prepared, detailed, high-quality knowledge is made available to a specific target group addressing a clearly defined topic over many years.

Customer and prospect data: Everyone talks about Big Data, but the hype is wholly exaggerated in many areas. Just collecting data is not critical. You must collect valuable data. Customer databases are almost standard today. If your database also contains 5,000 potential prospects and you can statistically prove that you will gain around 20 percent as customers in the future, then you have built up an attractive marketing asset. This can then be marketed profitably as part of a sale.

Newsletter: Newsletter campaigns often accompany extensive customer and prospect lists. If you can clearly and comprehensibly demonstrate in the course of the sale that your newsletter has high open, click, and buy conversion rates, then you have created a valuable asset. Here, too, there are no size limits for the intrinsic value. The price tag on that value depends on the eye of the beholder. If you negotiate with a buyer who already sells complementary products, this direct new customer access represents considerable value.

Intangible Asset Categories: Services and Processes

Other intangible assets are often less well known, and many owners are unaware that they have created value. Here are a few examples:

Reference and customer list: Every successful company has several references and customer lists, which are not always updated or fully maintained. A reference list consisting of many well-known customers is an absolute asset. After all, you demonstrate your understanding of quality and your price expectations. The lists should show customer names and the appealing and impressive logos of their respective companies.

Software and processing structures: Many companies, especially older ones, have explicitly developed expensive software programs due to a lack of off-the-shelf alternatives. These programs ensure efficient handling of day-to-day business and represent a competitive advantage. Therefore, you should include appropriate evaluation options and screenshots in sales documentation as part of the marketing effort. This underlines your professionalism and documents the capital that the seller has already invested.

Processes, methods, and templates: We cannot generalize these points: Not every process, method, or template is an intangible asset. However, service companies, in particular, have converted numerous templates and work steps into efficient operations. They usually contain multiple error prevention strategies and quality assurance measures. Therefore, if they are properly worked out and presented, these defined and documented processes are sometimes of considerable value. For this purpose, look through all your contracts, offer texts, sales presentations, and service instructions, etc.

Intangible Assets Create Goodwill

Intangible assets are often complex for owners to identify. Is identifying, defining, and documenting the expenses and effort of such investments worthwhile when selling a company? According to Value Scout’s experience, yes. Although not every company brochure or the mere existence of a Facebook page increases your company’s value, every buyer notices whether you have invested time and money in these areas. Eventually, many of the intangible assets listed above require significant effort, time, and creativity. If you do not attach great importance to day-to-day business, you can differentiate yourself considerably from your competitors by relatively simple means. A buyer ultimately acquires the business system you have created. If this system is unique and difficult to copy, buyers will usually acknowledge this with a higher purchase price.

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Makalyn Feaster

Makalyn Feaster

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