Intangible Assets in Business Valuation: What They Are And Why They Matter

by Inzamam

railways in a train station close-up photography

Some objects are easy to count and measure: money, rare artifacts, glittering diamonds and generous hunks of gold. Things get much trickier when you can’t simply weigh the valuable item on a scale or assign it a quantitative value. Such items are called intangible assets. In this article, we will explore in more detail what intangible assets are and how they are measured.

What Qualifies As An Intangible Asset?

What makes an intangible set valuable is that it provides some tangible economic value. This value might not be readily apparent just by reviewing a business’s records.

To give you an idea of what an intangible asset is, here are some common examples:

  • Trademarks
  • Copyrights
  • Lease Agreements
  • Employment Contracts
  • Franchises
  • Customer Lists
  • Computer Software
  • Noncompetition Agreements
  • Goodwill
  • Licensing Agreements
  • Trade Secrets

Why Measure Intangible Assets?

Measuring intangible assets may seem like a futile endeavor, especially since they have no concrete numbers backing them up. But think of it this way: if you and your spouse run a business but one day decide you want to go your separate ways, you want to make sure that you can still hold on to what you have worked hard to create. That doesn’t just apply to the products that have already been crafted and placed on the shelf but also to future products that have not yet seen completion. A simple piece of paper like a patent can ensure that you can keep creating what you put work into making a reality.

How Are Intangible Assets Measured?

Intangible assets vary in function. As such, it doesn’t make sense to value a patent the same way you would a leasing agreement. What does help is to consider the following criteria when assessing the value of intangible assets:

  1. Market Demand. Ask yourself honestly: does the asset satisfy a present consumer need? If so, what is that need and what is a realistic price for the average consumer? 
  2. Income Potential. Of course, you’ll also want to consider how much money the asset can generate long-term. This can be hard to predict, which is why there are many different methods available for calculating intangible asset value. 
  3. Cost of Production. Sometimes, an idea may look incredibly lucrative on the surface. In many ways, it may be. Unfortunately, you may find out that the cost of producing a product outweighs what you earn from it in the end. Such factors should be taken into account when estimating the value of an intangible asset.

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