Free assets, also known as intangible assets, are frequently overlooked as entrepreneurs crunch the numbers and seek to tangibly prove growth and value. Tangible assets and proof of value is, of course, vital but overlooking ‘free assets’ is at your brand’s peril. In fact, they could represent the difference between a good business valuation and a great business valuation.
What are intangible or free assets?
Assets are defined as free if they cannot be quantified into your bookkeeping. Similar to your equipment or stock, free assets are also an asset category, but unfortunately, they are not quantified into your financial records.
Ironically, these invisible assets are often the quintessential differentiators that set your brand apart or far ahead from the rest of the market. As we all know, earnings are the tangibles that investors and financial institutes want to see for assessing a company’s value.
Intangible assets, however, are a crucial factor in your real business value and can include staff talents, engaged company culture, patents and other intellectual property.
When working through mountains of paperwork in preparation for selling a business or attracting investors, all the bean-counting can often distract business owners from making an effort to quantify their important intangible assets. If it is not due to distraction, then it could be due to a lack of time or tools to achieve the quantification. Time needs to be set aside in the early phases of valuation to assess the value of these invisible assets.
Another irony is that it could be argued that the majority of your brand’s value is, in fact, free assets! The inability of contemporary accounting processes to synthesise this crucial value results in business owners not getting a full business or product valuation.
The quantification quandary
Interestingly, the majority of accounting processes are steeped in legacy from up to seventy years ago. Tangible assets are as easy as pie to see, measure, value, record and report on, and hence, historically, wealth is based on what can be physically presented.
This legacy approach hit some significant road bumps when technology burst onto the market as an asset and a significant enabler of wealth creation.
Wealth is created by a company’s ability to create, assign, collate, assimilate, protect and capitalise knowledge assets.
One of the steps that finance experts take to achieve an indicator of a company’s value is to multiple the recorded cash flow by a factor. A greater factor should be assigned for the calculation of intangible assets.
Through this, intangible assets can make your company value soar. Now that should have grabbed your attention!
We have mentioned staff talents, engaged company culture, patents and other intellectual property as intangible assets. Within intellectual capital, there are four categories, namely:
Human capital – A company with weak management is risky and will not attract investors. Management talent and staff talent are critical success factors.
Customer capital – Customer loyalty takes effort, and if you have achieved this, you will be rewarded by the boost it gives your company value. Loyalty means repeat business which means you will have a lower cost per sale, which is very attractive to investors. A huge headcount of customers that change every month is high risk and less attractive.
Structural capital – This is operational structures and procedures that effectively give your customers a better buying experience, allow more strategic management of the company and increase staff engagement. This, therefore, supports customer and staff loyalty, i.e. human capital and customer capital. Items included in this definition are employee and customer contracts and specialist protection of intellectual property.
Social capital – A company culture that has staff engaged, excited and unified is very valuable. Productivity levels are higher as well as customer service and proactive problem-solving. If it can be replicated in another company, it has value.
Human capital is the most difficult to protect, and if you are moving towards an investment cycle or wanting to sell, then ensure your staff and client contracts are not expiring.
Keep detailed and organised documentation of all your systems and update them regularly versus storing the info in the staff’s heads. Cover all departments: production, sales, customer service, marketing and even product development. The process of documenting and updating takes time, effort and management, and the investment of human capital and time cannot be measured. A business owner thus might be tempted to debate the value of it. Be assured, it is of enormous value ‒ if documented.
How to build free, intangible assets for your business
To build free, intangible value into your business, you need to identify those assets and then document the value extracted from those assets. This gives a degree of tangibility to an otherwise intangible benefit and therefore converts this into a transferable asset. The easier the comprehension of the value is, the easier the sell.
Knowledge of the value of free assets is not a new revelation; however, what is new is recognising the value of documenting it. Brand value has always been critical, but quantifying and communicating it can be complex and time-consuming.
Venture capitalists, economists and shareholders are becoming increasingly aware of the pivotal value of free, intangible assets and expect business owners to effectively collate and present the related value proposition.
Not only should an accurate value proposition be produced, but the business owner needs to show:
how they strategically support the protection and growth of their intangible assets, and
how they manage those assets into delivering tangible returns.
With market pressures always increasing, the need to extract extra value from a company ultimately drives business owners towards better collation and management of intangible assets. This will be enhanced by ameliorated systems and methodologies for conveying this value to investors, financial institutions and shareholders.
It is becoming evident that there are not only market pressures causing a business strategy evolution regarding the financial justification for accurate management of free, intangible assets. There is a growing demand that the value of these invisible assets be scrupulously assessed for tax and accounting regimes in preparation for and presentation during acquisition journies. The key is to maintain this assessment process and regularly update records with adjusted valuations.
Are intangibles important in business?
Market observers are translating the across-the-board, big-brand profit cautions as the writing on the wall for super-brands. Financial analysts believe that the problem with the majority of these brands is that they have failed to follow advice regarding the assessing, quantification and recording of their intangible asset values. These same financial analysts estimate that the brand value of some of these companies is forming up to 60% of the total company value. Without this valuation, companies are valued at 40% of their potential value ‒ and these are not small startups. Makes you think, doesn’t it?
But why are investors, financial institutions and shareholders assigning so much value to free, intangible assets? What is the justification behind the valuations concluded?
A powerful brand impacts customer buying behaviour and raises the price appetite of the customer base as well (especially in the consumer market segment).
A stable, eminent brand has gained such a reputation due to consistent quality that meets or exceeds expectations. In the luxury sector, a brand also addresses the bourgeoisie need for elevated social status. A strong brand also reduces the barrier to entry in new markets or new segments within a market, which has been demonstrated by supermarket chains stepping into the financial services sector. This is an excellent display of tangible benefits from intangible assets.
Free, intangible assets are a powerful leveraging tool that amplifies your USP and places you far ahead of the competition. These are not simple business mechanisms that can be captured with legacy journal entries. These require strategic assessment and management as well in-depth comprehension of their inherent value in order for that to be expressed in a tangible value statement.
Any company’s power to achieve its business goals is fueled by the strength and correct nurturing of customer relationships, its perceived brand value, and the engagement of employees through all levels. This is not expressed via digits in a bookkeeping journal.
Yet, the profound effect of these factors, negatively or positively, is a game-changer for the company’s ability to sustain profits, performance and growth.
The query that business owners should raise is not about whether intangible assets are important enough to monitor but rather: What big actions are owners or directors taking to manage these vital assets?
How to manage free, intangible assets
Presumably, the critical value of these assets has been driven home now, so now we need to move on to the important process of managing these precious assets in today’s disrupted markets.
Clearly, management needs to set aside time, headcount and investment. A brand’s representation out in the market and ALSO internally must be consistent, and the behaviour must match the speeches.