How can you do a proper valuation when there is no
line item
for your Intangibles on your Balance Sheet?
There is something
aloof with Intangibles. If as much as 85% of the value of your business¹ is tied up within your intangibles, why are
they so untouchable?
Since 1994 my wife
and partner, Hattie Bryant, and I have been working away at building the
foundations for SmallBusinessSchool. Each year we push money, time, and
creative resources into defining what the school is and where it can go. Every
quarter when we receive our financial statements, there is no line item for the
value of the web site, the brand, each of the episodes (our product), and an
entire array of services that are summarily lumped as goodwill.
We decided to find
out what others in our industry are doing to value what we consider to be key
assets of our business. If you take the SIC codes that define your industry and
enter that SIC code + intangibles into a search engine, you'll be presented
with a list of references, often to financial statements and the notes about
intangibles.
Now, there is a
rather formal group called the Financial Accounting Standards Board
(FASB); they accrue sages within the accounting industry and they have a
special study group about
intangibles. If you acquire a business and pay a
considerable amount for the intagibles and goodwill, consider this
Statement of Financial Accounting Standards No. 142,
Goodwill and Intangible Assets upon acquisition, the ascribed value of the
intangible shall be amortized over its useful life. But, what if that life is
indefinite (or has a possibility that it could be indefinite)?
The issue
transcends all borders; there is also a joint report of FASB and the
International Accounting Standards Board (IASB) on the
comparability of cross-border financial reporting of "Accounting for
Nonmenetary Transactions." Even the
UN Statisitcs Division, National Accounts has a report
about "Intangible Assets." In 2003 the European Union issue this report of
their
Task Force on Entertainment, Literary and Artistic
Originals (if this link does not work, please
drop
me a note -BEC).
Understanding and
valuing intangible assets is a new key to unlock the knowledge industries for
the 21st century. It should be among those things that are foremost on our
mind.
Consider these statements from
Value Based Management: "In 1978, 5% of all assets were
intagible, in 1998, 72% of all assets are intangible, currently 75-85% of all assets are intangible."
Yet, intangibles
are not regarded as assets in traditional accounting systems and therefore fail
to be reliably measured as part of "the economic value of a business." See also,
Duff &
Phelps, LLC (FAS 141 ) and
Valuation Consulting (Kelvin King, author: Valuation &
Exploitation of Intellectual Property & Intangible Assets) and
International Valuation
Handbook (IVH) and
Federal Tax Valuation Digest – Thomson, and
National Association of
Certified Valuation Analysts (NACVA).
There is nothing
easy about all this stuff. Consider these accounting notes from
News Corp regarding their intangible assets: "Non-current
assets are written down to the recoverable amount where the carrying value of
the non-current asset exceeds the recoverable amount. The recoverable amount of
publishing rights, titles, television licences and goodwill has been determined
by discounting the expected net inflow of cash arising from their continued use
or sale. As a creator and distributor of branded information and entertainment
copyrights, the company has a significant and growing amount of intangible
assets, including goodwill, free and cable television networks and stations,
film and television libraries, sports franchises, entertainment franchises, and
other copyright products and trademarks. In accordance with generally accepted
accounting principles the company does not record the fair value of these
internally generated intangible assets. However, intangible assets acquired in
business combinations are recorded, as the difference between the cost of
acquiring entities and amounts assigned to their tangible net assets." If I
take this very slow and ponder and work at it, maybe I think it is
understandable.
We've got some
work to do!
One way small
businesses can get their intangibles on the table is to do a valuation through
the Entrex model (with
Morningstar) which opens the possibility of taking on equity
partners. |
