A huge portion of a company’s value rests on its underlying intellectual property (IP). Market share often rests in a brand name and margins often rest on know-how and experience. Whether or not this IP is adequately identified and managed can mean the difference between valuing your company correctly and selling your company short. That value is important because it is the number you are using to raise money, sell your business, or attract financing.
Out with the old…
How is a company typically valued? A standard corporate balance sheet contains all the features that are expected – revenues, margins and tangible assets. If you were to look at the balance sheet of a company 50 years ago, you would see a very similar list. The book value of today’s global corporation is derived largely from accounting practices created hundreds of years ago to record transaction costs and the assets that are owned by the company. It seems odd that such practices should still be the only factors that apply to modern day companies.
…and in with the new
Whilst the old cost approach still applies to part of the balance sheet, it can’t be the only indicator used to value a company. A modern company has other components that give value, even without realising it. These intangible assets include IP, brand, software systems, staff experience and expertise, market research, advertising, business processes, and the like. These are the assets that work behind the scenes to make a company what it is. Traditional accounting practices inadequately give value to or even miss these intangible assets, to the detriment of your company’s value.
Ocean Tomo, an intellectual property merchant bank, released findings¹ from its Intangible Asset Market Value Study of the composition of equity market values. According to the study, the average company’s intangible assets, most especially its IP and technological know-how, account for 84% of its market value. Intangible assets, such as technology know-how and its patents, trademarks, and other IP make up the difference between the book value and the market cap. Business owners need to recognise the components of their company that really add value.
Capturing the hidden innovations
A company needs to identify their intangible assets before value can be attributed to it. Smart businesses routinely evaluate not just the assets listed on their balance sheet but also make sure they have systems to identify and capture their hidden innovations. The biggest challenge in doing so is the disconnect between the management team, who needs to make decision about how to handle IP and the employees who are the ones tackling problems in their everyday work. This leads to innovations being missed and ultimately lost to the company. The best way to bridge this disconnect is through ongoing staff education to develop a culture that encourages the reporting of innovations. A database can then be established to track the progress of the innovations. This ensures the management team has all the information at hand when making decisions regarding intangible assets.
Leveraging the value
Being aware of the IP is one thing, but correctly managing the IP and leveraging its potential value into real value can be a difficult task. More often than not it will require the registrations of at least some of the IP to ensure adequate protection is in place.
The valuation given to a patent takes into account the savings the technology gives your company and the impact it has on market share by third parties being prevented from using the technology. The other advantage is the ability of IP rights to open your business up to alternative revenue streams through technology licensing arrangements. The filing of a patent application for every small innovation does not always make commercial sense. It’s important therefore to ensure that each and every one of your employees is under an employment contract that assigns all IP rights to your company and prevents them from disclosing your IP both whilst in your employment and after. Ongoing education to remind your employees about their responsibilities is also important.
Both established business and those that are just getting off the ground need to recognise the part that intangible assets play in their success. Regardless so the industry you operate in, up to 80% of a company’s value lies in intangible assets. A company’s value can be increased by identifying and managing the part that intangible assets play to the company. This increased value leads to more business and larger growth.