The rise of the intangible asset business
The balance sheets of businesses have seen a substantial change in the last couple of decades. Previously, for the majority of businesses, tangible assets were the primary driver of the value of a business, writes Maria Peyman, senior associate at Birketts LLP.
Now, just 20 years (or perhaps less) later, the intangible assets amount to 70 per cent of the modern day corporate balance sheets and 53 per cent of the total value of the FTSE 1001.
This is readily reflected in the rise of businesses such as Uber and Air BnB – taking a traditional business and using technology to partner those with the goods (taxis and hotels) with those needing a lift or somewhere to sleep.
The businesses require limited initial outlay on their own tangible assets such as cars or real estate.
Despite the value attributed to intangible assets on the modern business’s balance sheet leaders of some of the most innovative global companies have issued warnings that the value of those assets is being overlooked; research has attributed some of this due to a lack of acceptance at board level of the value of intangible assets such as IP rights but rather an area of potential significant cost to the business.
Some is also attributable simply to a lack of understanding of what an intangible asset is and what it means to the value of the business.
As a quick reminder examples of intangible assets are, trade marks, domain names, customer lists, literary works, musical works, pictures, licensing agreements, service contracts, franchise agreements, rights of use, computer software, trade secrets and patented technology.
A brief look at the list by any business owner should cause them to stop and think about what exactly their business owns which might be of value beyond traditional bricks and mortar.
However, by their very nature it can often be difficult for a business to identify its intangible assets of value and to ensure that they are protected. Compare that to real estate which simply requires a visual check to ensure it is standing and keeping insurance in place.
These are relatively easy steps in comparison to creating an inventory of all intangible assets. In respect of intangible assets a business needs to work out whether the assets are protected by automatic rights, (such as copyright in the business’s images or manuals), or, whether it needs to have a registered right such as the patent for the new drug or a trade mark for your brand name and logo.
If, considering the examples cited of AirBnB and Uber, they are not owners of something tangible the business can, arguably, be replicated by the development of software, then what is it that helps those businesses rise above the others?
Of course, it can be luck, the first into the market place, the one with a good sponsor, the one with an early lucrative contract. However, it is often also the development of other intangible assets, for example, the ‘brand’. Development of a brand starts with securing a name and protecting it by registration. The brand can then be developed further by enforcing rights and ensuring a consistency in those allowed to use / be associated with the brand.
As set out above, intangible assets have real value and worth for a business which means they can be offered as security in a developing business looking for investment or sold.
There is no doubt that a well-structured business with a balance sheet based on intangible assets can obtain significant investment and/or be sold for a significant value.
However, to make the intangible assets give the greatest return they need to be properly identified, ensure that where necessary/possible any rights are registered and that steps are taken to enforce those rights against third parties who may seek to ride on a business’s success.
• Call Maria Peyman on 01223 326596 or email her at: maria-peyman [at] birketts.co.uk