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  • Proper Valuation & Presentation of Intangible Assets in the Sale of a Business

    Feb 8, 2016

    February 3, 2016 was a very important day in the world of college football. It was the day when senior high school football players across the nation had their first opportunity to formalize their relationships for the next season with their university of choice and accept a scholarship to play football at the NCAA level. The futures of players, coaches, and football programs can be dramatically impacted by decisions made by coaches & players annually on National Letter of Intent Day regarding who to offer scholarships to and which scholarship to accept. The acceptance of a scholarship by a student-athlete is the culmination of one of the great intangible asset sale efforts that exists in American society. The sales professionals who make these pitches do not receive enough credit for the skill necessary to have success in the environment for when a substantive comparison is a made between educational & athletic opportunities at the schools offering the scholarships the tangible differences between the offerings that can be quantified are not significant. The deciding factors for most athletes accepting a scholarship are likely the nuanced playing & personal development opportunities conveyed by the coaches, the mental image created by the coaches related to the school’s history & traditions, and the information shared by past & current players related to their experiences going to school & playing at the university. All of these items are intangible assets of a college football program that will have different perceived values in the eyes of different student-athletes. The university that offers the package with the most perceived value will receive a signed letter of commitment from the student-athlete they desire to be part of their team.

    One of the characteristics that separate IBA from other firms that sell privately held companies is our ability to effectively value & professionally present the intangible assets of a business. Most business brokerage firms can convey the information contained on a company’s income statement & balance sheet. However, the value of a business cannot be determined by simply valuing the equipment, inventory, and by looking at the EBITDA of a company and applying a multiple found in a book. A proper valuation of a company also needs to assess and value appropriately the intangible assets of a business. The intangible components that impact business value that IBA evaluates when determining an appropriate price to bring a business on the market include the risk to the business model associated with the transfer of ownership, the revenue & profit trends for an individual company and the industry of the business, the company’s competitive place in the industry & served area, the quality of the company’s financial records and infrastructure, and the anticipated desirability of the company to potential buyers in the marketplace. The ability to correctly value these intangible assets requires a level of knowledge and experience that can only be gained through active engagement in the business brokerage marketplace over an extended period of time. The professionals at IBA demonstrate the accuracy of our knowledge in valuing businesses by delivering sale prices consistently within 10% of the original asking price of the business with full asking price sales a common occurrence at our firm.

    The proper valuation of the intangible assets of a company is an important task that occurs at the start of the business sale process. However, the valuation is only relevant if it can be conveyed & justified to a potential business buyer. It is commonly known that the valuation of a business is subjective science. This is true because valuing a business is part investment valuation and part art valuation. It is an investment valuation because the purchase price is partially based on the anticipated, future return on investment associated with the acquisition. It is an art valuation because each business is a unique entity with no direct market comparable in the marketplace. Even the most straight forward business model (e.g., gas station) will see identically flagged businesses with similar revenues & profits sell for dramatically different prices based on intangible components such as competition in the marketplace, demographics of the served community, and regulatory changes anticipated or occurring from government. Any business broker that conveys to a potential client that business valuation is a straight forward process that can be performed without industry & regional knowledge is being dishonest.

    The key for an entrepreneur wishing to sell their business for the maximum value possible in the marketplace is to engage a business broker that has the ability to convey the intangible assets of a business to the spectrum of different types of buyers that exist, for it is the buyer who perceives the most value in the intangible assets of the business that will always pay the most for a company. The sale of intangible business assets is a sophisticated, nuanced process that requires business acumen, knowledge, and experience. It is a process that generally requires direct interaction with the buyer through a series of meetings and/or telephone conversations. The sale of intangible business assets by an experienced mergers & acquisitions professional has many similarities to the sale of a football program to a recruit as successful completion of the sale will require the buyer to perceive the package of intangible assets offered to be significant enough to justify action and make a life changing decision.

    IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media and the mergers & acquisitions community on confidentiality and any other subjects relevant to the purchase & sale of a business.

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