COVID-19 related challenges have resulted in cash flow pressures and a decline in the book value of many companies’ balance sheets. But if you think the only way to sell your business in the current environment is through a fire sale, think again.
Michael Masterson, Managing Director of intangible asset advisory, valuation, and transaction specialist, EverEdge, says businesses can maximise their sale price by identifying hidden intangible assets and better understanding their potential future value.
What is an intangible asset?
“We use the term in a very literal sense, which is anything that you can’t kick with your toe,” says Michael.
“There are lots of ways of describing an intangible asset, but ultimately what we’re talking about is how your business is going to drive margin and/or market share. If both are strong, there is something underlying that which is driving the business, and it’s a matter of working out what makes you special; what your secret sauce is.”
“In 1975, intangible assets accounted for 17 per cent of company value,” he adds. “Today they account for 90 per cent.”
Michael explains that one reason people are confused about intangible assets is linguistic.
“A lawyer will use the term IP, an accountant will say goodwill, and if you talk to Warren Buffet, he’ll call it an economic moat. If you ask a board director, it’s non-financial risk. Manufacturers will call it secret sauce, competitive advantage, or unfair edge.
“Ultimately, it comes down to how your business is going to do better than a competitor or someone coming into your market. And in the context of selling a business, it’s about how you can differentiate yourself and say you’re more valuable, your intangible assets are more valuable than another business that someone can buy.”
Preparation for Sale
If you are thinking of selling your business, Michael recommends taking a number of steps to maximise its value.
Step One – Identify your intangible assets
This is not always easy because intangible assets are generally difficult to identify on a profit and loss statement; they won’t appear on your fixed asset register and rarely get near the balance sheet.
“The first thing we say to every company we deal with is to just work out what these assets are,” he says. “Unless you know what they are, you’re not going to treat them like an asset. We find people inadvertently give things away in due diligence because they don’t know it’s an asset.”
Your intangible assets may include registered and non-registered rights: patents, trademarks, data, content, software, brands, confidential information and designs, code, trade secrets, industrial know-how, regulatory approvals and standards compliance.
Michael says each of these needs to be examined. For example, data is technically anything in a digital format, but he draws the following distinction: “Are you talking about binary data? Zeroes and ones? Big data, metadata, customer data? The thing is, you’ve got to work out where the data is valuable.”
A potential buyer often prizes customer information, but Michael recommends identifying other types of data that are valuable enough to steal, like your pricing information, operating manuals, or procedures.
Step Two – Mitigate the risks associated with your intangible assets
“If you want maximum value for your business, you need to get rid of the risk,” says Michael. “If you sell your house, you don’t want buyers walking in and seeing holes in the wall, especially if it’s going to cost $10 to fix, but add $1,000 of value; that’s a no brainer.
“Risk is the same. The biggest risk we see in every business, small or large, is they don’t leak a little bit, they leak like a sieve. They’re telling their customers stuff they shouldn’t, they’re telling their suppliers stuff they shouldn’t, and typically the employees know things that they shouldn’t.
“The second risk is what’s called chain of title. This is being able to prove that you actually own your assets. Now, obviously, if you’re selling a service station, that’s reasonably straightforward, but making sure that you own the code for creating a software business can be more complicated.
“Risk number three is scary. Well over half of the companies we deal with do not own their brand in the way they think they do.
“And the easiest way to push down the sales price is for the buyer to pick up on any of these three things. Protecting these assets is often very, very cost-effective.”
Step Three – Maximise your sale value
The key to getting the best price for your business is to value your assets in a way that is meaningful to your buyer because people won’t pay for what they don’t understand. The third step, says Michael, is a function of the first two.
He emphasises that the numbers are important, and you can’t ignore them. But once you understand that assets have a different value to different people, you can create a narrative that explains the numbers and reveals your business’s current and future value to the buyer.
“The best example I can give you is Instagram,” says Michael. “You might go, ‘Hang on, Michael. Instagram is a huge business. Why are you giving me this case study?’
“Instagram had been going for two years. They had 12 staff. They had no assets. But they had a very significant and growing customer list. And a good product. But they had zero dollars in revenue.
“Anyone on the planet would have said that business was worth zero. Any accountant you went to, any business valuer, all would have said zero.
“Now, I’d like to think we would have given Instagram much better advice, and what we would have said is, ‘Well look, you guys have got something that’s really disruptive. It’s worth a lot to someone with big hands. Who’s got the biggest hands for what you’ve got?’
“In this case, it was Facebook. Facebook paid a billion dollars for Instagram, and the reason it was worth a billion dollars is that was its worth to Facebook. Because if Facebook didn’t buy it, then Yahoo, Google, or Amazon, would have.
“Part of that was competitive tension, as well, because if Facebook could have bought it for a dollar, they would have bought it for a dollar.
“But they knew that if they didn’t pay something pretty significant, someone else would buy it. Zuckerberg also knew that Instagram was the biggest threat to Facebook, and if Yahoo or someone like that had bought Instagram, there would be no Facebook today.”
The role of advisors
It is difficult to be emotionally detached from a business you’ve created and loved, making it hard for business owners to be realistic about its value. This makes external advice critical to the sales process.
“If you think good advice is expensive, wait until you pay for bad advice or no advice,” says Michael. “And get advice from people who have been on the battlefield, not people who have read a book, or only understand one part of the process.”
Understanding the importance of intangible assets to the sales process has been fundamental to EverEdge’s success. The company can identify value because it doesn’t see a business merely through the eyes of an IP lawyer, an accountant, or a business broker.
“One thing I try to do – and I’ve learned this the hard way – is to surround myself with people who will tell me things that I don’t know, not the things I do know,” reflects Michael.
“Because no-one ever succeeds with everyone telling them how wonderful they are. The people who help you are the ones that say, ‘Actually, you don’t know everything; here’s something you don’t know.’ And you’re like, ‘OK, that helps me avoid that mistake.’ If you can avoid a mistake, that is the fastest way to save money in your business.”
Michael says that intangible assets are something entrepreneurs should be congnisant of not just when it’s time to sell but from the start-up phase.
“Your brand starts off as your least valuable asset, but what you find over time is the brand is where all the value resides. It’s ultimately a scorecard.
“If you have a brand you can’t protect, every day you spend building it, you’re pretty much wasting every dollar. I’m dealing with a small business owner at the moment, helping her develop a brand that will ultimately be defensible and protectable. Now, in fairness, she’s still got to grow the business underneath that, but what it means is she’s not building her business on quicksand any more but on bedrock.”
Michael’s observations about selling your business
- People aren’t buying you for your desks, chairs, and computers. They are buying your company because they think they can turn what you’ve got into money.
- To maximise your sale price, you need to identify your intangible assets, protect them, and position them so the buyer can see their worth.
- Most people sell to a supplier, a customer, or a competitor.
- Intangible assets are always worth more in big hands than small hands.
- Never sell to one buyer. Too often, people are opportunistic sellers because someone approaches them, but competitive tension is healthy.
- Timing is everything because you are always exposed to the market. The question shouldn’t be, “Can I sell?” It should be, “Should I sell?”
- Sometimes waiting for the best price is the worst thing to do.