The NH Chapter of the Institute of Management Accountants is hosting Trek principals, Mary Adams and Michael Oleksak, at their February meeting.
From the event announcement:
Did you know that a balance sheet presented under U.S. generally accepted accounting principles can only explain 20% of the value of the average company? The rest is lumped together as “intangible.” Very little is known or understood about this hidden 80% of value, yet this information gap affects the ability of management teams everywhere to make the right decisions and drive growth performance, as well determine the true value of their company. Read more
If you look at our stock markets and the companies that dominate the news today like Google, Apple, Facebook and Microsoft, there is no doubt that our economy has shifted to the knowledge era.
If you look at the financial system that “supports” this economy, however, you see something completely different.
Unlike the companies it finances, this financial system is still deeply rooted in the industrial era, when huge capital investment was needed to build large-scale production systems. That made the finance industry a critical component of the development of the economy. And gave financial players a seat at the table in all the great growth stories.
In recent years, this system hasn’t played as important a role in the development of our economy. In fact, if you ask me, it has used the tools of the knowledge era (computing and information management) to pursue a lot of speculation. Nevertheless, it’s managed to keep a hold on a lot of what goes on. An obvious example was when Facebook hired Goldman Sachs to raise money without “going public” last year.
There are some really interesting hints at an alternative future in different forms of what’s called “crowdfunding.” A recent report in the New York Times described how a lot of restaurant start-ups are using this funding strategy: Read more
October 25, 2011 by Mary Adams · Comments Off
The last chapter of Intangible Capital is entitled Reputation Is the New Bottom Line.
In it we explain that, while the financial bottom line is still critical to the success of every business, it’s not enough. The financial bottom line helps you put cash in the bank. But the reputational bottom line gives you the license to continue to generate cash in the future.
Reading the NY Times recent overview of the Netflix saga, I couldn’t help but see this as another example of the power of reputation. Netflix lost 800,000 subscribers and 25% of its stock price after they announced an unpopular change in their pricing model.
The article recounts an interview with Netflix CEO Reed Hastings: Read more
October 23, 2011 by Mary Adams · Comments Off
I have had some interesting behind-the-scenes conversations with Michael Mandel about the guest post he asked me to write about the post-industrial production economy. (I hope that you will read and comment there)
Here, I would like to take a deeper dive on a question Michael asked me about the the scenario I paint of this knowledge economy production–whether it matches up with today’s goods-based world and whether it might feel like a drop in living standards for some or many people. It’s a goodquestion and here are some thoughts. Read more
October 18, 2011 by Mary Adams · Comments Off
I have been really heartened to see more attention to the way that the intangible information gap skews investors’ understanding of what’s really going on in today’s knowledge-driven companies. This latest article comes on the heels of a Reuters piece last month calling for getting intangibles on the balance sheet.
Yesterday, this new examination came in Jeff Saut’s Market Call column where he quoted Steve Vannelli of the GaveKal Platform Company fund talking about technology and intangible capital (I added the bold):
To this technology point, I asked Steve to discuss his “knowledge,” or intangible capital, theme. He responded by stating that our current accounting system doesn’t value “intangible capital accumulation” appropriately. Most certainly, intangible capital accumulations are “expensed,” not capitalized. Such accumulations increase productivity, foster more efficiency, and drive better financial money flows than are currently measured. Moreover, if you are not measuring such metrics correctly, you are also not measuring our country’s “economic output” correctly. For example, “What is Amazon’s (AMZN) “search engine” worth? Read more
September 30, 2011 by Mary Adams · Comments Off
As the wife of a baseball expert (and co-author with Michael of Beisbol) I known for years about Bill James, Sabermetrics and Michael Lewis’ book, Moneyball, that inspired the new movie starring Brad Pitt. So I was more than happy to head out on the opening weekend to see the movie.
What I didn’t expect was how much it felt to me like a parable about intangibles and innovation.
Here’s the Moneyball story: Baseball lends itself really well to statistical analysis because every move can be and is counted. If you’ve ever been to a baseball game, you’ve probably seen a fan in the stands keeping track of the progress of the game: each batter’s strikes, balls and hits. For a hit, there is an accounting of the fielding of the ball and the advancement of the runners.
These statistics have always been available through annual compilations and huge baseball encyclopedias. Fans of the game have pored over these stats for more than a hundred years. Read more
July 31, 2011 by Mary Adams · Comments Off
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
July 20, 2011 by Mary Adams · Comments Off
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
July 8, 2011 by Mary Adams · Comments Off
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
To date, economists have focused on measuring intangibles at the macroeconomic level. And they have developed compelling data showing the growing importance of intangibles to economic growth.
But accountants and business leaders have been slow to pick up on this. The only widespread application of intangibles measurement comes through the Balanced Scorecard approach and the growth of the performance management field. The problem that I have with both of these approaches is that they are ignoring the powerful starting point of intangibles value creation that the economists have laid out for us: investment. Read more