Buying or Selling a Business: Intangible Assets

When buying or selling a business it can be challenging to value the tangible assets, like real estate, equipment, fixtures, furniture, and inventory. It can be even more of a challenge to value the intangible assets.

Intangible Assets

As the name suggests, intangible assets are assets that are not physical in nature – they can’t be touched. Intangible assets include:

• goodwill
• trade secrets
• patents
• trademarks
• copyrights
• recipes
• business methods
• brand recognition
• websites
• social media presence, including friends and followers

Following is a brief discussion of some types of intangible assets and factors affecting their value.

Understanding Goodwill

In a business transaction, “goodwill” is defined as “the established reputation of the business regarded as a quantifiable asset.”

Someone acquiring a company will often pay for more than just “bricks and mortar” physical assets of the target company. The amount paid for a company over and above the value of its tangible assets includes goodwill. Goodwill can be assigned a value and appear on a company’s balance sheet as an asset.

Someone acquiring a company can also pay less than the target company’s “book value,” in which case the target company is said to have “negative goodwill.”

Positive goodwill can be based on factors like:

• the length of time the target company has been in business
• the size of the company’s customer base
• the popularity of the company’s products
• the recognition of the company’s brands
• the company’s reputation for quality

Obviously, the value of goodwill is highly subjective. An acquiring company runs the risk that the goodwill of the target company will be worth less than anticipated. If the financial markets believe this to be the case, then after a merger the share price of the merged company may drop, as happened with the AOL-Time Warner merger in 2001.

Intellectual Property

Intellectual property includes patents, copyrights, trademarks, and trade secrets. These are forms of intangible property protected variously by state, federal, and international law.

Changes in the law can have a significant impact on the value of intellectual property. For example, recent court cases such as the US Supreme Court’s decision in Alice Corp. v. CLS Bank International have called into question whether certain computer-related inventions are patentable. Some have predicted patent value write-downs, and even shareholder suits based on lost patent value, in light of recent legal trends.

Other patent law changes, such as the inter partes review process under the America Invents Act, make it easier for companies accused of violating a patent to challenge the validity of the patent. A patent ruled to be invalid has no value as an asset.

Social Media

Despite the increasing importance of social media and “content marketing,” companies often pay little attention to the value of social media in mergers and acquisitions.

Social media and related intangible assets can include:

• Facebook, LinkedIn, and other social media pages for a business and its products and/or brands
• blogs and microblogs
• consumer-oriented forums
• virtual worlds and communities
• reputation — as established by positive ratings on sites like Yelp

Reputation can be an extremely fragile asset, and can be destroyed by any touch of scandal. For example, in a merger or acquisition involving a company that relies upon consumer ratings, the target company should be required to make a representation and warranty that its ratings were not fraudulently manipulated with fake reviews sponsored by the company.

If you are involved in a merger or acquisition…

If you anticipate being involved in a merger or an acquisition, you will probably need to consult with a corporate attorney who specializes in M&A transactions.

Case Studies: Valuing Intangible Assets in Business Transactions

Case Study 1: Acquiring a Technology Startup

A large tech company was interested in acquiring a promising technology startup. The startup had developed innovative software and held several patents. In the due diligence process, the acquiring company carefully assessed the value of the startup’s intellectual property.

This analysis included a comprehensive review of the patents, copyrights, and trademarks held by the startup. By properly valuing the intangible assets, the acquiring company could determine the fair purchase price and negotiate a favorable deal.

Case Study 2: Selling a Professional Services Firm

The owner of a successful professional services firm decided to sell the business and retire. The firm had built a strong reputation and had a loyal client base. The buyer recognized the value of the firm’s goodwill, which represented the established reputation and customer relationships.

During negotiations, the seller and buyer agreed on a valuation that accounted for the tangible assets as well as the intangible asset of goodwill. By acknowledging the importance of intangible assets, both parties reached a mutually beneficial agreement.

Case Study 3: Assessing Social Media Value

A company exploring a merger with a social media-driven brand sought to understand the value of the brand’s social media presence. The brand had a substantial following on various platforms and leveraged social media as a crucial marketing tool.

The potential acquirer engaged in a thorough analysis of the brand’s social media assets, including follower engagement, brand sentiment, and content quality. This evaluation helped determine the brand’s overall value and informed the merger negotiations.