Manage Intangible Assets to Increase Profits

Chuck Faunce, Director of Business Valuation and Litigation Support at Gorfine, Schiller & Gardyn, explains how companies can make intangible value tangible in 2021.

Q: What are tangible assets, and what are intangible assets?

A: Tangible assets are the stuff you can touch – desks, chairs, computers, machinery, equipment, buildings. Intangible assets are harder to describe, but one way to think of them is as collections of valuable knowledge and information that you have about your customers, your employees, and your processes, as well as information that your customers have about your business’s reputation and capabilities.

Q: What are some examples of intangible assets?

A: Intangible assets are things like customer relationships, proprietary technology or internal operating processes, creative works like blueprints or manuscripts, and contracts.

Q: Why is it important for business owners to understand the value of intangible assets?

A: Business owners should care about a business’s intangible assets because there’s a very good chance that they constitute most of the value of the company.

Q: How can business owners make their business’s intangible value more tangible?

A: Even though intangible assets are frequently the most valuable assets for a business, they’re generally not reflected on a company’s financial statements because the financial accounting rules don’t allow them to be recorded. That missing information makes it harder for owners to understand their assets, which slows down the management decision-making process, or makes it harder to make a good decision, or both.

Business owners can start to make their intangible value more tangible by incorporating intangible assets into the internal-use financial statements they use to manage the business.

Q: How exactly can business owners use these internal-use financial statements to manage the business?

A: Unlike tangible assets, most of the time, there’s not a receipt that acts as a starting point for the value of the intangible assets. So the first step in measuring the value of intangible assets requires defining the assets being measured.

Q: Once business owners define the assets, how do they measure their value?

A: Since there’s no receipt, the most common way to value intangible assets is to discount expected future cash flows to a present value. The math behind that is a bit of a specialty and it’s typicallydone by a valuation expert. But the most important part of that process is when the valuation expert works with the business owner or business manager to develop metrics for the calculation. Those metrics have to be items that are relevant to managing the business.

Q: How do business owners benefit from incorporating intangible assets into internal-use financial statements?

A: Defining the intangible assets will help management understand how they’re related to the company’s strategy and its marketing, operational, and financial characteristics. The better owners and managers understand the assets of the business, the better their decision-making process, which improves their company’s chances of generating bigger profits. It also allows management to think and act more quickly when unpredictable events, such as this past year’s pandemic, occur.

Chuck Faunce is the Director of Business Valuation and Litigation Support at Gorfine, Schiller & Gardyn and has more than 20 years of experience providing clients with valuation consulting services including financial and tax compliance reporting, economic damages analysis and expert testimony, and buy and sell side transaction analysis.