The value of a business is more than its cash flow. Although many Australian business owners and management teams have been left pondering their future after a turbulent 12 months, it is important for those moving towards a sale or capital event not to automatically settle for a lower valuation. Instead, businesses should focus on identifying the strength of their underlying assets and the potential of these assets to drive future value, writes Michael Masterson, Managing Director at EverEdge.
Today, intangible assets such as data, content, software, brands, customer and supplier relationships, regulatory approvals, and confidential information, account for over 90 per cent of all company value. These assets are the key drivers of growth and profitability for virtually every company outside real estate. However, due to outdated accounting standards, these assets are frequently under-reported on company balance sheets, creating or hiding major risks and opportunities.
Understand where your value lies
One thing that is certain is that the current market is unpredictable. If Australian business owners don’t identify the key assets driving value; create a strategy to protect and leverage these assets; work out who these assets will be of most value to; and make sure they have a defensible valuation that articulates the value of all their assets, their end price will be significantly lower than it should.
While an intangible asset valuation can be more complex than a traditional valuation, by taking into account all the assets within your business, it can significantly increase the value and sale price of your business. Some may claim that you can’t assign value to a company’s data, patents, confidential information, software code, regulatory approvals, relationships, or brand, but this simply isn’t true.
Today, intangible assets are likely to be the most valuable assets a company owns – but alarmingly, it is likely that the majority of these assets will be lying off the balance sheet. You only need to look at the world’s three most valuable companies (Saudi Aramco, Microsoft, and Apple) to see how this holds true, with trillions of dollars of value being driven by their intangible assets and almost all of it lying off their balance sheets.
Cash flow is not a good indicator of likely future value
In another example, take the COVID-19 vaccine. If someone created a new cure for the virus but hadn’t sold a single vial, would anyone tell them it was worth nothing? In short, they wouldn’t because although the company may not have made a single dollar, it is the research and development, innovations, software, brand, networks, formulations, and confidential information where the true value lies in this scenario.
For companies looking to achieve the highest sale price for their business – especially in times of market volatility – an intangible asset valuation will provide a robust, defensible, business-focused report that articulates and contextualises the value of all the assets the company owns (both tangible and intangible).
The reason some businesses are still thriving
With so much uncertainty in the market, companies need to avoid getting too focused on cash flows or tied-up in arbitrary valuations and instead focus on identifying the assets within your business that are driving value and profitability.
Currently, it isn’t a V, U or L shaped recovery that we are seeing in Australia, but a K. This means that while some companies are experiencing extremely strong growth, many others are struggling or failing completely.
And if you look at the companies that are thriving, it is primarily those that have greater concentrations of high-value intangible assets. These companies are leveraging their assets to achieve faster growth and stronger earnings and are also demonstrating more resilience to market volatility than those companies that have a greater focus on fixed assets.
To be in this camp, it is important that companies start to identify and define those assets that are driving value. By developing a plan to protect and leverage these assets, identifying who these assets are likely to be of most value to, and ensuring that you have a strong and defensible valuation that goes beyond the balance sheet, business owners will be able to demonstrate the potential future value of their assets and maximise their sales prices – even against the backdrop of uncertainty that the Covid-19 pandemic has created.
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