Tom Goodwin’s (Head of Innovation at Zenith) comment on Airbnb being the biggest hotel chain without owning any real estate and Uber being the biggest taxi company without owning any cars has become almost like a mantra that is being repeated when illustrating the opportunities created by new technologies. However, it is also a good example of the power and rise of intangible assets. As intangible assets continue to grow, we will need new tools to value and manage them. But what are these modern untouchables?
Nowadays, it feels like you only need and idea and an internet connection to revolutionise an industry. New technologies and interfaces have brought many advantages not only to small businesses but also growth opportunities in a global scale making nothing feel like something.
Most companies today don’t produce anything you can actually touch or see. Sometimes it’s even difficult to understand the whole concept of a product or service. Nevertheless, the businesses bring enormous benefits to their customers. It seems we are creating and experiencing value in a completely new intangible manner, which has raised a conversation about the economic value of companies. For example, many of us probably wouldn’t be able to articulate what it is exactly that Google does, but it is still regarded as one of the most valuable companies in the world, economically speaking.
Intangible assets are a source of value in many companies today – probably to a degree many wouldn’t even believe. Value can be assigned to physical assets such as real estate, but it can also be given to intangible ones such as a brand name just as long as the asset can be documented and managed correctly. When it comes to actually valuing intangible assets, there are a host of classifications to lean on. Value can be assigned to assets such as:
- Critical employees
- Customer and partner networks
- Research & Development
- Knowledge transfer systems
- Project workflows
- Patent and Intellectual Property Rights (IPR)
- Quality control systems
- Internal IT-systems
Never buy a pig in a poke
Intangibles are already the main drivers of modern economies, and the emergence of new technologies will only increase investments into intangible assets. To illustrate, Sundar Pichai, Google’s CEO, said recently “AI is the most important thing we are working on now […] It will be bigger than electricity or fire”.
As intangible assets multiply, we need to solve how to measure economic value holistically. New principles and standards are needed to update a range of policy frameworks, including corporate reporting and intellectual property rights.
Most importantly, the financial industry needs to adopt new valuation methods to appreciate all asset classes and business owners must educate themselves on how to identify and manage these generally overlooked assets to leverage opportunities.
In the event a business is up for sale or looking for further financing, it is imperative to understand the true value of different assets. Incorrect valuations can be detrimental in case the sale or financing negotiations don’t yield the expected outcome. Business owners could face unexpected tax implications following a deal gone wrong and investors are at great risk if they miscalculate the current and potential value of the underlying assets of their investment.
There are many different ways to perform an analysis of company assets, but many methodologies overlook intangibles. Read more about our valuation model Insight, which has a special focus on these modern untouchables.