What Are Intangible Assets? 

Instead of asking that question, maybe we start with “what are the Tangible Assets?”  Business owners can wrap their arms around those much easier.  The simplest tangible asset to grasp is Net Income.  It’s the amount of money the company made over the past 1, 2 or 3 years.  Sometimes it’s referred to as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization).  For valuation purposes, it can be Cash Flow.  This can be calculated by removing the owner’s salaries from the cost side of the equation, thereby increasing the profit.  Other tangible assets include trucks, tools & equipment, cash on hand, receivables, etc. less the corresponding liabilities of payables, bank debt, loans & other notes, etc.

So then, what makes up the Intangible Assets?  These are a little fuzzier, less definable and more subjective.  These include items such as leadership and management (besides the owner), solid accounting systems and processes, recurring revenue such as maintenance agreements, inventory control, employee retention, cash flow management, marketing, dispatch or project management software, and so on, and so on.  The items contained in this category will be evaluated, weighted and eventually make up the multiplier used to factor the Cash Flow number.  That will then give you your value of the goodwill for the business. 

Most business owners confuse income or profit with value.  Just because your business makes a bunch of money doesn’t mean someone will pay you a lot for it.  Especially if most of that profit is as a result of your hard work and you plan on walking away once it’s sold.  Increasing the sale value comes from maximizing the intangible assets that increase the multiplier.  Having great profit and great value together makes your business more desirable and worth a lot more when it’s time to sell.  Don’t wait until you’re ready to walk away before you deal with the Intangible Assets.  It could cost you a lot of retirement income.