How to Find The Value of Intangible Assets
In the realm of business, assets are typically thought of as tangible possessions like property, equipment, or inventory. However, there is another category of assets that are equally—if not more—valuable but are not physical in nature. These are known as intangible assets. In this blog post, we will delve into the concept of intangible assets, explore different types, methods of valuation, and highlight their significance in the business world.
What are Intangible Assets?
Intangible assets encompass a broad spectrum of valuable assets that lack physical presence and are often intellectual in nature. Examples of intangible assets include trademarks, copyrights, patents, and brand recognition. Unlike tangible assets, which can be touched or felt, intangible assets cannot be held or manipulated.
Assigning value to intangible assets presents a unique challenge due to the uncertainty surrounding their future benefits. Intangible assets are hard to quantify in monetary terms, and so experts rely on various valuation methods for classifying the correct value for such assets. It’s essential to note that intangible assets can either be created by a company or acquired through transactions. However, company-created intangible assets do not appear on balance sheets and carry no recorded book value.
Definite & Indefinite Intangible Assets
Intangible assets are typically long-term assets whose value tends to appreciate over time. These types of assets can potentially become very valuable, and as a result, are crucial for a company’s long-term success. They can be categorised into two main types: indefinite and definite.
Indefinite Intangible Assets
Indefinite intangible assets remain with the holder as long as operations continue. A prime example of this is brand names, which can endure for generations and hold significant value for businesses.
Definite Intangible Assets
Definite intangible assets have a finite lifespan and are often tied to specific agreements or contracts. An example of this is operating under another company’s patent with no plans for extension beyond the agreed-upon period.
Types of Intangible Assets
Intangible assets are typically held by companies. The most common types of intangible assets include brands, goodwill, and intellectual property.
Brands
Brands play a crucial role in distinguishing a business from its competitors. They encompass elements such as logos, symbols, names, and slogans. Brands are developed through marketing efforts and are essential for building brand equity and fostering customer loyalty. These assets help consumers to easily identify a particular company, for example, people can easily identify Nike by just looking at its logo.
Brands help to build a company’s brand equity and customer loyalty; some consumers may pay extra for a product with a certain emblem or celebrity endorsement. As a result, companies with stronger brand equity can charge more for their products since they know what consumers are ready to pay for them, even if the prices are higher than those of a competitor.
Goodwill
Goodwill arises when one company acquires another, and any surplus over the fair value of the target’s net assets is classified as goodwill. If the amount is above the target book value, then it results in positive goodwill. It reflects the intangible value associated with factors such as customer loyalty, reputation, and employee satisfaction.
Intellectual Property
Intellectual property (IP) refers to legally protected intangible assets, including copyrights, patents, trademarks, and trade secrets. Unauthorised use of intellectual property is prohibited and can result in legal consequences such as infringement.
Valuing Intangible Assets
Many brands’ success heavily relies on brand recognition, such as Apple. Brand recognition, though tangible, impacts sales significantly and so can increase its value. Valuing intangible assets poses a significant challenge due to their intangible nature. There are three primary approaches to valuing intangible assets:
- Cost Approach: This technique is based on the concept of substitution and does not take into consideration future benefits; it is strongly dependent on the consumer having a “similar enough” second alternative, such as Coca-Cola and Pepsi. It is computed as an estimate of all the costs connected with creating, coding, and testing the software. Businesses must also account for research and development expenditures, legal fees, licencing expenses, and any other costs associated with the creation of the intangible asset. This technique of valuing intangible assets excludes future benefits, such as the brand’s rising worth over time.
- Market Approach: The Market approach provides an indication of value by comparing the intangible asset with identical or comparably similar assets for which price information is readily available. This method poses challenges due to the limited information on comparable effects held by other businesses.
- Income Approach: The value of an intangible asset is determined by reference to the present value of income, cash flows or cost savings attributable to the intangible asset over its economic life.
Intangible Asset Example
An exemplary case of how an intangible asset has provided value to a company is Nike. As a globally renowned brand in the sportswear industry, the company possesses a plethora of intangible assets that contribute significantly to its success and market dominance.
Over the years, Nike has built a strong brand image synonymous with innovation, performance, and athleticism. The iconic trademarked Nike swoosh logo and the “Just Do It” slogan have become ingrained in pop culture, contributing to the brand’s widespread recognition and appeal. Nike holds numerous patents, trademarks, and copyrights related to its footwear designs, apparel innovations, and marketing materials allowing Nike to safeguard its unique product offerings and branding elements contributing to its competitive advantage and enduring success in the global sportswear industry.
The Benefits of Intangible Assets
The benefits of intangible assets vary depending on the type of asset. For example, patents offer legal protection for inventions or processes, while copyrights and trademarks serve different purposes but are equally valuable in protecting intellectual property as seen in the example mentioned above.
For further explanation on different types of intellectual property, check out our blog post where we cover all the benefits that the various forms of IP can give you
Use Patent Insights to Develop More Effective IP Strategies
Intellectual properties, such as patents, are among the most valuable intangible assets a company can possess. Utilising patent search tools like Minesoft Origin can provide valuable insights and empower companies to develop more effective IP strategies, including licensing opportunities. Get in touch with our team today to request a demo and discover how you can improve your patent search process.
In conclusion, while intangible assets may lack physical presence, their value and significance in the business world cannot be understated. Understanding how to identify, value, and leverage intangible assets can be a game-changer for businesses looking to maintain a competitive edge in today’s dynamic market landscape.