Comparables and Valuation: the role of intangibles in setting a market price

I  made the case earlier this month that corporate values are largely intangible today and that you can influence the value placed on your company by the market by sharing information on your intangibles.

What I haven’t discussed is the role of “comparables” in the valuation process.

Comparables are transactions for similar companies. The tell you the price and basic data from M&A for companies of similar size and business model in your industry. Seeing the price that other companies go for gives a good feeling for the overall market for businesses like yours.

But when you dig into the data, you’ll find a huge variation in results. There are often companies that have sold for as little as 2-3 times EBITDA. And others that have traded for numbers as high as 14-15 times EBITDA. The natural first inclination is to assume that your company is in the top category, Read more

Intangible Capital Reading List on Twitter for 2011-07-28

• Google apps customers should be the first to get #GoogleProfiles not be shut out of it! #

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Intangible Capital Reading List on Twitter for 2011-07-22

• Have investment banks discovered patents? http://feedly.com/k/qCRvYC (yes, they have!) #

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The Goodwill Problem

Everyone loves to hate goodwill. It’s this amorphous, misunderstood number that sits on many companies’ balance sheets and causes headaches year after year when it has to be adjusted.  People assume that  represents an over-payment by the acquirer. And accountants look at you with a straight face and say that the entire value could go away in a moment.

Goodwill is created when a company buys another company and has to bring the acquired company into its accounting. There isn’t a lot of good data about this but there is one great study from a few years ago from Ernst & Young that tells us that the average deal is 47% goodwill. The rest of the deal is booked as 23% named intangibles and 30% tangible assets. The total intangibles are thus 70%.

Believe it or not, that 70% intangible figure was less than the 80% average intangible value in public companies in that same time. So, rather than having some wildly optimistic value that it is often painted to be, the average acquisition is in line with (or more conservative than) prevailing corporate valuations. Read more

Intangible Capital Reading List on Twitter for 2011-07-20

• Yes!-spread the word! RT @PhilPrestonTwit: Did you know that intangible assets now dominate company valuation? http://bitly.com/iJWFfq #
• Scientists on Boards of Directors as proxy for IC of co–paper shows positive impact on firm value http://ning.it/pnX4eT #intangiblecapital #

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Intangible Capital Reading List on Twitter for 2011-07-12

• IC Practitioners web meeting in 11 hours….9 AM EDT. RSVP to receive log-in info in the morning http://bit.ly/nqEPSp #

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Intangible Capital Reading List on Twitter for 2011-07-10

• A powerful op ed on racism and the death penalty by a former college classmate of mine, David Dow http://nyti.ms/riuJbg #

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Intangible Capital Reading List on Twitter for 2011-07-09

• Want to understand the value of sharing #intangiblecapital Check out The Power of Open http://bit.ly/nxHX51 #

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How Much Is My Company Worth? Understanding the intangible drivers of corporate valuation

Corporate valuation. It’s one of the two key metrics for a business owner. The first is cash flow/income in the short term. For some, that’s as far as they get. But, for the really successful ones, the second metric is how much cash they can realize upon exit from the business. My partner, Mike Oleksak, calls this “getting paid twice for the same effort.”

If you use both metrics, a private company can be a very exciting place to be. Because this perspective helps you balance short-term gains with sustainable value. It helps you think about how to build a business that will grow profitably and sustainably. (The lack of this kind of thinking is a huge problem for public companies today but that’s a topic for another day).

But the process of valuation is a mystery to many business owners. Even those that understand how it works, can’t always put their finger on why values end up the way that they do.

That’s because valuation is really a very subjective process. And it has gotten more subjective in the last thirty years as our economy has shifted from an industrial to a knowledge model.

Why? Read more

Intangible Capital Reading List on Twitter for 2011-07-07

• RT @mherrera63: Intangible assets such as systems,software,processes,training pgms and R&D represent investeme… (cont) http://deck.ly/~imb3k #
• #humancapital alert – We have done a better job against sexism than we have against momism http://bit.ly/pgnB1l wasting a great resource… #
• Intangibles aren't just about #CSR – internal sustainability is key too (see my comment) http://bit.ly/pUVMPj #

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