This article is brought to you by RGL Advisors.
When preparing a company for sale or evaluating a target company, it’s imperative to understand the role intangible assets play. To examine the importance of intangible assets to middle-market companies, we analyzed data from the Russell Microcap Index, which measures the performance of the “microcap” segment of the U.S. equity market.
A company’s value is determined not only by the fixed and financial assets, like real estate inventory and cash, but also by its intangible assets. In fact, these assets increasingly comprise the greatest portion of a company’s value and often have significant transaction implications. Intangible assets include a company’s brand, customer relationships, economic goodwill established within the community, an assembled and trained workforce and, of course, intellectual property like patents, trade secrets, copyrights and trademarks. As shown in the figure to the right, intangibles are the single largest asset class examined, comprising more than one-third of lower and middle market valuations. While there was obvious variation among the industry groups examined. intangible asset values were prominent across all major market sectors.
Valuing these assets can be a complex undertaking where there are few clear answers. Because of their inherent nature as being intangible, not every corporate finance professional can reliably quantify or value these assets. They must possess a level of comfort with valuation methodology, as well as intuition, experience, judgment and an understanding of economic, market and industry trends. A viable valuation will help illuminate any interdependence of assets within a target company and how each contributes to enterprise value. The magnitude of this interdependence can greatly influence the scalability and sustainability of a business, which in turn may impact post-acquisition strategy or integration.
Matthew Morris, partner of RGL Forensics and managing director of the firm’s broker-dealer, RGL Advisors, LLC, is a veteran investment banker with 15 years of experience advising corporate clients and shareholders in transactions. He has advised on more than two dozen transactions with an aggregate value in excess of $2 billion.