Intangible asset valuations

September 3, 2018

Last time I discussed goodwill – what it is and how we estimate it in business valuations.

I recently heard from Chris Mellen, a US valuations guru, about valuing a business for sale, particularly relating to intangible assets.

Let’s say that a business makes a small profit, but there is significant equipment and working capital. Basically, the business is not generating a premium above its tangible assets.

Most of the time valuers would argue there is no goodwill due to a low overall return on assets.

If you are selling your business, that is not something you want to hear.

What about the intangible value in things like:

  • Relationships with customers
  • Brand (business or product)
  • Intellectual property
  • In house software

All of these things can be valued separate from the business. In fact, when a corporate (ASX listed) company makes an acquisition, they go through the process of identifying value attributable to:

  • Tangible assets, like equipment
  • Intangible assets, like brand
  • Goodwill (the leftovers).

There are good examples where intangible assets have value, but the owner of the business is not generating a profit that supports any real value.

Recently we were involved in valuing a business that had a portfolio of products that were sold to builders. Overall, the business was making a small profit, but certainly not enough to support any significant goodwill. At product level, they had a vast range of products from small items to larger materials used in construction.

They owned one product that was a household name. The brand and product features had been in the Australian marketplace for more than 50 years. The product sales were flat (no growth) and was generating losses at product level.

It was a sleeper. The business had no interest in developing the product or making sure every builder continued to use it, rather than a cheap import.

Their biggest competitor was very interested. The business owner was convinced to sell the product, along with the brand and unique manufacturing process, and achieved a pretty decent price.

We were involved in valuing the product to support the price negotiation based on the potential market and significance of having a brand name that is well known.

Can you value the intangible assets within goodwill or in a business for sale. Absolutely.

In the words of Brian Billick (former Baltimore Ravens coach) “Intangibles are a euphemism for we have no idea what we are looking for but we know it when we see it”.

Thanks for reading.

Lachie McColl
BV Specialist