What price intangibles?
June 6, 2023
How to value intangible assets….a revealing case study.
You really can put a price on anything…
I have just finished a call with someone where we really got into the bones of where value exists in a private company and its shares.
Understanding the difference between a tax framework valuation and an IPEV guidelines valuation is always a good starting point.
The prudent investor, open market, and willing buyer/willing seller scenario is very different from the IPEV framework in terms of how you think about valuation.
However, the really interesting bit comes when you look at the intangible assets in a business (those bits that do not appear in the forecasts or company accounts such as IP or the value of the team).
With so many businesses these days not being solely holders of tangible assets, the big debate is around intangible assets.
As you are busy I won’t spend pages explaining how we crack this issue, barring giving you a rather interesting case study.
Two early twenties entrepreneurs with no previous track record in business have built a software company that has in the last two years gone from £mil to £15m turnover.
What’s more, they have a pipeline today worth over £1bn.
What are those people worth to the business?
What is their market rate as developers and even as sales people?
I am guessing a few £000,000s each were they to speak to a head hunter. That is clearly nonsense in this scenario as a way of understanding their value.
Where the value is, is in the entirety of the package.
Firstly its about the two of them as a combined unit.
Functionally there is value in what they do in their jobs day to day (probably replaceable by others – see comments in the previous paragraph).
That can be calculated by looking at the market rate for each of the jobs the two do today, but misses the magic of them being a team and what they have proved that they can do – a classic case of 1+1 does not equal 3 but probably 10!
That should be impossible to quantify, but it can be done.
One approach is to work out just how much a global corporate would invest to get to the same opportunity in the same time period.
We all hear about how much Microsoft and Google are throwing at AI innovation.
There is no question that grown-ups would invest £ms in researching, planning and delivering such a real and enormous opportunity.
So here is a framework for us to understand what these two stars are worth. Happy days.
