By Troy L. Harmon, CFA, CVA, Director of Research, Henssler Financial
In performing business valuations at Henssler Financial, we have the opportunity to meet some interesting entrepreneurs who have built some interesting businesses. Many have taken simple concepts and turned them into something spectacular, including restaurants with unique supply chains and industrial companies with patents protecting them from competitive threats. Sometimes these differences, however minor they may seem, are the difference between great profits and business failure.
What we’re talking about here is intangible value. Something difficult to put a price on in many cases. How does the fact that a company hires more individuals with specific industry professional designations reflect in a company’s value compared to its peers? Sometimes it’s quite simply in their ability to garner higher revenues, take market share, or gain higher profits. When we look at industry averages, these values are not always evident. In fact, companies with intangible assets, being valued like the average industry participant may be undervalued. Instead of finding previous transactions for companies in similar industries and blindly applying the average price-to-revenue ratio, analysts should work to identify whether the subject of their project has intangible value.
Some intangibles are obvious. If the company has a patent, legally disallowing other market participants from manufacturing one (or many) of their products, it should be obvious that the patent has value. However, the true value of that intangible and many others could be found by measuring how much greater their revenue is relative to competitors, or by measuring how much faster their revenue can grow or how much more the company can charge, thus leaving them more profitable.
Entrepreneurs who think in terms of competition will be quick to understand the potential sources of these intangible assets. Securing a supplier with cheaper pricing or manufacturing components at a lower cost than competitors can, often yield this benefit. Creating a more efficient or quicker process can increase production speeds and volume. Solving the customer’s problem in a better way or making goods that can be offered cheaper while still making a profit is another intangible asset. These are the things successful entrepreneurs create every day, and we continue to marvel at their resourcefulness and creativity. Better, faster, more valuable, less costly, and not immediately evident to the casual observer describes many intangible assets. If you have any questions about the value of your business or ways to make your business better, contact the experts at Henssler Financial: