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Maximising Your Business’s Intangible Assets

Maximising your business’s intangible assets is vital to making your business attractive to investors. Intangible assets can be a neglected area for many smaller businesses. However, unless you understand, develop and protect your business’s intangible assets, you are prejudicing its future growth. You are also potentially giving yourself a lot of unnecessary grief.

Take a look at the bottom line of the standard Auckland District Law Society / Real Estate Institute of New Zealand business sale and purchase agreement wording below. Many business owners only think about the content of the “intangible assets” line in the calculation when they come to sell, but it’s really too late by then.

Tangible Assets                         $
Intangible Assets                    $
Stock in Trade:                         $
TOTAL PURCHASE PRICE    $                        
                                                 (plus GST, if any (clause 12.0))

So, if you’re getting interested, what are intangible assets anyway? In the ADLS/REINZ agreement, intangible assets are defined as follows:

  • The intangible rights, licences and benefits owned or used by the vendor in respect of the business;
  • All intellectual property rights and interests owned or held by the vendor, or used by the vendor in connection with the business, including, without limitation, patents, trademarks, copyrights, software, registered designs, trade names, domain names, symbols, logos and trade secrets;
  • The goodwill of the business

While it has its problems, this definition is as good as any. Cutting to the chase, intangible assets are essentially a collection of intangible rights created by law. Note: this definition covers a lot more ground than traditional “intellectual property” as it is commonly known.

The reason maximising intangibles can be in the too-hard basket for many smaller businesses is that it requires long-term planning. So where do you start? It is a matter of pulling yourself out of your comfort zone and thinking big.

Let’s compare a person making an investment in a publicly listed company (“PLC”) with an investment in a small/medium enterprise (“SME”).  Don’t forget that as the owner of an SME, you are also an investor.

What affects the value of your investment? What affects value, long or short term, is the way the business is operated. Let’s take a look at the salient features of PLCs and SMEs.

Professional Directors Owners/Directors
Specialist Advisors Skimp on advice
Researched Growth Strategies Underdeveloped Growth Strategies
Global Strategy Local Strategy
Equal focus and investment in intangible assets as well as (tangible) physical assets Focus on tangible assets. Less interest in investing in development & protection of intangible assets

You buy shares in a PLC with an exit strategy. You plan to sell them when it suits you and the market is right, so you can get a good price. PLC shares are typically liquid ie. you can sell them when you like.  However, unless the owners think big, SME shares are typically not liquid. This can mean the business owns you, rather than you owning the business.
Underneath it all, each has the same legal structure, there is just a size difference. But of more significance is attitude. And what’s the result for your investment?

Intangible assets create a platform for growth. However, what we see too often is an SME with potential where the owners don’t take the right steps to create this platform for growth. They struggle away spending money on the wrong things and eventually leave too much on the table for a far-sighted purchaser. Such failure to prioritise will inevitably affect the bottom line.

The directors of the world’s fastest growing companies focus on maximising the business’s intangibles. It is hard to overlook the fact that they are businesses with significant intangible assets such as Apple, Amazon, Facebook, Google, Microsoft and Xero.

A key point is that directors understand that with intangible assets, as time goes on the opportunity to secure decreases, and the cost to do so rises.

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