If you’re contemplating selling your business, consider intangibles such as your client list, your firm’s reputation and overall goodwill.
For many business owners, the value that they’ve built into their company is more than a source of personal pride—it’s a promised gateway to a retirement they envision and the legacy they hope to leave to their family and community.
Passing through that gateway—via a sale of your company—can be a complex process. If the value of your business were limited to hard assets such as buildings, equipment and real estate, then determining what your company is worth would be a matter of straightforward accounting, says David C. Johnson, Wealth Strategist for Regions Private Wealth Management. “Things like equipment and machinery are generally identifiable in terms of their acquisition costs and depreciation on the company’s books.”
But it’s likely that your company’s true value resides in other, less visible forms. Intangible assets can be much harder to measure, but they could hold just as much or more value than the parts of your business that you can actually touch and feel.
The reality of intellectual property
When taking stock of your intellectual property, start by thinking of the things that you know that nobody else does. “Intellectual property includes everything from trade secrets to royalties you may be getting from patents or licensing agreements,” Johnson says.
Johnson warns, however, that intellectual property doesn’t hold its value forever. “It’s like an oil or gas well you’re drawing royalties from that’s ultimately going to be depleted. There’s a declining value to these things,” he says. “For example, a patent has a specific life span, and its value will depend on how much time is left.”
You can help boost the value of intellectual property by keeping careful records, Johnson says. Keep clear, well-organized information for prospective buyers about your patents, licensing agreements and other intellectual property. He also recommends protecting your trade secrets by requiring anyone who uses them to sign a nondisclosure agreement.
Goodwill, great value
The aspects of a business that fall under the heading of “goodwill” may be even less tangible than intellectual property. But they can have equally significant value.
“Goodwill is your reputation,” Johnson says. “It’s the propensity of customers to return for repeat business.” And while it is indispensable, it can be hard to gauge, encompassing your reputation for quality and service, a positive brand image, strong customer and supplier relationships, and a good standing in the community.
Valuing goodwill is easier for publicly traded companies, whose stock tends to rise right along with the company’s reputation and decline when that reputation takes a hit, Johnson says. For a privately held company the process is more nuanced. Its value is determined by how long it has been in business, the steadiness of sales growth and its profit margins. “When an expert comes in to value your company, they’re going to look at all of these things,” Johnson says.
In smaller companies, the owner’s personal reputation is often inextricably linked to that of the company, which can complicate the valuation process. Prospective buyers may worry about the company’s prospects after the owner leaves. When planning for a transition, look for ways to enhance the company’s reputation as a whole, Johnson suggests. That might mean promoting key employees to be more visible with your customers and suppliers, and in the community.
Having a company where people like to work, even after you’re gone, may also boost value in buyers’ eyes, Johnson says. “We’re at full employment in the U.S. right now, and you need to keep them ‘sticky’ to your company.” Consider benefits such as a nonqualified deferred compensation (NQDC) plan, which offers key employees cash bonuses at a later date, as a way to reward and retain them beyond the sale, Johnson says.
Making the intangible tangible
Given the complexities of valuing your business, expert help is essential. “What you really need is a certified valuation analyst (CVA) who has completed training specifically in valuing businesses. You need that to have a value you can be confident in and stand up for,” Johnson says.
Your Regions Private Wealth team can help you find the right CVA, attorney, tax specialist, mergers and acquisition advisor and other experts. “This is a collaborative effort that requires multiple disciplines,” Johnson says. Your wealth strategist can make sure all of the experts communicate regularly with one another—and with you—before, during and after the sale. That way, your business’s assets, tangible and intangible, can reach fruition in a sale that will benefit your retirement and your legacy.
Speak to your Regions Relationship Manager about:
- The value of any intellectual property your business has acquired or created
- How your company’s goodwill may be affected by your departure
- Additional strategic factors to consider when preparing your business for a sale
