As a CPA/Business Appraiser folks often ask me about the value of intangible assets including goodwill which is often referred to as “Blue Sky.” Questions like how do you value intangibles and what intangible asset is the most important? My answer is always the same cash flow is the key factor in determining if your business has any intangible value at all. The reason is that if you expect a 20% return on your tangible assets and you have a million dollars’ worth of physical assets your business needs to generate $200,000 in net after tax cash flow just to meet the required rate of return on the hard assets. If the business is generating anything less than $200k there would be no intangible value based on cash flow. If the business was generating $300,000 in after tax net cash flow, then $100,000 of the cash flow would be a return on the intangible assets. If the after-tax capitalization rate was 20% the value of the intangibles would be $500,000. There is a remote chance that some intangibles e.g. patents and trademarks might have value even if cash flow does not support a return (a cost-based approach could be used to ascertain any value in the absence of reasonable cash flow). Convincing someone to buy an intangible based upon any other than cash flow could prove to be nearly impossible.
But a question that I have often wondered myself is “which intangible assets are most valuable” e.g., customer list, trademarks, patents, or customer relations. I was excited to read a recent survey by MARKABLES which shows that customer relations is the most important intangible asset. The survey found that customer relations makes up 25% of enterprise value. Next in line were software and technology, at 18% of enterprise value each, and last comes trademarks, at 8%. This is encouraging because we all have some control over our customer relations–we can all love our neighbors as ourselves–and the natural progression will be good customer relations.
