Quantifying the Drivers of Intangible Asset Value
Identifying and quantifying Intangible Assets (IA) is a common dilemma for organisations of any size, from bootstrapped start-ups to massive global enterprises.
Let’s start with the basics: tangible assets are physical assets. Intangible assets are not. This simple definition has unfortunately been misconstrued many times and has led to a misunderstanding of what actually is an intangible asset.
Broadly speaking, the world has been shifting from an industrial economy reliant on physical assets to a more knowledge-based economy reliant on intangible assets. Intangible assets are often described as an organisation’s “Intellectual capital” or “Intellectual property”. These intangible assets contribute to a company’s enterprise value but have little to no value on a company’s balance sheet – despite driving margins and above these balance sheet cash multiples. For example, lack of IA understanding with a weak balance sheet can result in awkward conversations with potential investors or business partners. From an investment perspective, underperforming balances sheets may hold more value than traditionally perceived. Likewise, overperforming balance sheets may carry a risk that is not identified.
IA value is misunderstood.
The term “intangible asset” is a broad umbrella that includes many different types of assets. Intellectual property is a term often used in place of intangible assets, but it is important to realise that intellectual property is only one type of intangible asset.
In its broadest sense, intangible assets can be grouped into two: intellectual property (IP) and intellectual capital (IC).
| IA Type | Afforded Protection |
|---|---|
| Patent* | Protects an invention which can be a physical thing, the way something works, a way of doing something, a composition or formulation, the way something is made or prepared, or the way things are combined. |
| Trademark* | Identifies the brand owner of a product or service by using a recognisable sign, design, or expression. |
| Design* | Protects the visual form of a product, such as the shape, configuration, pattern or ornamentation of an object. |
| Copyright | Protects original expression of an idea in the form of a creative work, but not the idea itself, and gives its owner the exclusive right to make copies of the expression. |
| Trade Secrets | Any confidential information, including secret formulas, processes, and methods used in production. |
| Proprietary Software | Software for which the software's publisher retains intellectual property rights, which is usually copyright of the source code but can sometimes patent rights. |
| Brand and Reputation | How a companies' brand is viewed and perceived by customers, stakeholders, and the market as a whole, and it is the culmination of ideas and emotions associated with the brand. |
| Research and Development | Activities undertaken by corporations or governments in developing new services or products or improving existing ones. |
| Critical Suppliers and Customers | Key relationships and agreements. Exclusive Government contracts for example. |
| Organisational Knowledge | The collective knowledge and abilities possessed by the people who belong to an organisation. |
| Strategy and Market Intelligence | Knowledge attributed to decision making in positioning the organisation in a market and knowledge of the market. Market intelligence can include datasets and consumer information. |
| Know How | Practical knowledge on how to accomplish something and is a component in the transfer of technology, co-existing with or separate from other IP rights. |
* denotes the IA is a registered IP right.
Ten Intangible Assets You Need to Know
All ten types of intangible assets, plotted on the graph above, are highly valuable for businesses, and will weigh differently in specific industries. The graph is a simple representation of how specific IA is more quantifiable than others, yet all drive value. The difficulty for executives is managing IA – much of which walks out the door with a key employee and USB thumb drive for example.
Intangible assets are pivotal to your competitive advantage. They are the major drivers that move enterprise value beyond cash flow multiples. Organisations which actively identify the value of their IA portfolio and pursue ways to protect their IA differentiate themselves from their competitors. Think of the most powerful companies around the world – Apple, Amazon, Google, BP, Chevron…etc – they all actively manage and robustly depend their IA. It’s not optional for companies which want to excel.
In our next article, we will outline the shift in IA valuation and insurance and how these value drivers must be assessed and protected.
© 2020 IAMC. Article by Matthew Yeates
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