An organisation's intangible assets are increasingly critical to corporate value, yet current accounting standards are not adequately equipped to capture them in financial statements. This information gap can affect valuations for the worse, especially if organisations are planning to attract investors.
Dentons Rodyk's Senior Partner S Sivanesan, together with Tyler Capson, the Managing Director of EverEdge Asia, co-hosted an interactive and engaging session on the topic "Intangible assets: Driving success, failure and higher valuations". The session shed some light on how companies can identify intangible assets, identify and reduce risk and the available valuation methods.
The importance of realistic valuations
In his opening address, Sivanesan emphasised the importance for companies to derive realistic and balanced valuations. If the valuation is too high, this could lead to an unattractive opportunity for investors. In contrast, if the valuation is too low, existing shareholders and founders may sell themselves short on the current full value of the company which could lead to unhappiness and disincentives to improving the business. It may seem attractive to have high valuations in the initial rounds of fund raising. However, such valuations would need to improve in subsequent rounds in order to avoid dilution. Yet when a stock exchange listing is being contemplated or in the case of a trade sale, such valuations may not be justifiable if companies are not able to prove that profits are being made. This was the case with WeWork recently. Sivanesan explained how all companies have valuable intangible assets and it is necessary to understand them in order to show investors the real value add brought to the table. EverEdge gives each company a sense of its worth in respect of intangible assets and provides an understanding of how to unlock such value while reducing risk.
Identifying intangible assets
According to EverEdge, in 1975, intangible assets accounted for 17% of company value. Today, they account for 87%. Intangible assets are everywhere. They are the primary drivers of company performance, but are: (a) typically off the balance sheet; (b) not captured within profit and loss accounts; and (c) not tracked on the risk register. So while most companies can track desks, chairs and company cars; few can identify, value or manage the risks and opportunities around their far more valuable intangible assets. This leads to material hidden value and significant hidden risks.
Tyler described the four steps in which EverEdge helps companies drive value and profitability: (a) identify intangible assets, (b) identify and reduce risk, (c) assess and value the impact on financial results and (d) unlock value such as through joint ventures, partnerships, selling the company etc. In identifying intangible assets, these can be far ranging from confidential information such as trade secrets and pricing strategies, systems and processes, data, patents, software codes, internet assets, regulatory approvals, to employees, brand, content, design, and networks. When it comes to valuation, traditional accounting standards which were set up in the industrial age are no longer a good indicator. They focus on cost as an indication of value which only works when it comes to physical assets but it does not apply to intangible assets such as software platforms, customer lists etc.
Identifying and reducing risk
Three areas where risk often occurs and which need protecting were then highlighted by Tyler. First, most companies' data is constantly inadvertently leaked, through employees, customers or suppliers. This results in competitive edge erosion, margin pressure and ultimately massive value loss. Second, 8 out of 10 companies cannot prove that they own intangible assets because they are not registered or do not appear in their profit and loss statements. Further, chain of title becomes an issue as a result of joint R&D, contractors, supply agreements, employee disputes and restructures. Third, many companies do not own their brand or have major brand risks. The problem is that if companies do not own their brand, they will not capture all of the market share for that particular product.
Tyler explained the process of valuing intangible assets. First, it starts with quantitative valuation using base line accounting principles and/or the income cost methods. Next, it is contextual, analysing who are the buyers/sellers and whether it is the right timing in market. Finally, qualitative valuation – evaluating the quality of the assets which most valuations do not cover, i.e. whether the asset is defendable and sustainable long term, or the strategic location of the company, or its unique relationships with sellers, patent or trademark. Provided a company can prove it, this drives a higher and defendable valuation.
In addition, Tyler emphasised that all directors and officers have a fiduciary obligation to their shareholders to manage all assets and risks including intangible assets.
The Seminar highlighted the need for a mind shift of companies to build up intangible assets rather than fixed assets. While the protection of intellectual property (IP) can be expensive and time consuming, investing in it especially at early stage is vital. Needless to add, having good legal advice for such matters is also critical. Singapore government provides assistance for the protection of IP.
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