Identifying Intangibles is the first article in our series about intangible assets.
What makes your company special, unique, or valuable? As a business owner, you will be asked this question countless times when you are talking to potential buyers for your ad tech company. But the value of a company is not inherently defined; value is defined differently by parties based on their respective goals, biases, and objectives. For a banker, this discussion is the foundation for all buy-side and sell-side M&A conversations. Based on our experiences and research at Jahani and Associates (J&A), intangible assets make up over 90% of M&A value. There are simple, repeatable processes you can use to increase your company’s value, especially in the ad tech industry (J&A, “Understanding Ad Tech M&A Value”). So how to identify intangibles for M&A?
How Accounting Standards Codification (ASC) 805 Can Be Used to Maximize M&A Value
In 2014, the Financial Accounting Standards Board released an update to ASC 805 addressing how to account for intangible assets in business combinations. ASC 805 is the basis for the financial reporting of intangible assets post-acquisition. Although it is not necessary for you to follow the ASC 805 framework, if you do not utilize it to uncover and measure your company’s intangible assets, you will ultimately limit that value. Businesses can use FASB’s ASC 805 as a framework for maximizing their value prior to beginning M&A conversations.
Step 1: Define the Most Valuable Intangible Assets for Your Ad Tech Business
The first step to maximizing your company’s value is to determine which intangible assets are the most valuable. In order to do so, you must define your desired business objectives. If you are not sure where to start, begin by asking yourself the following questions:
- Who are my customers?
- How is the strength of my customer relationship measured?
- What will my revenue stream rely on over the next one to five years?
Your business’ relationship with its customers is a symbiotic one: your company exists to serve your customers and your customers are the ones who keep your company in business. Utilizing valuable intangible assets will only enhance the business-customer relationship.
For example, if your desired business objective is to increase the number of users who click the ads placed on your platform (in other words, increase conversion), you need to provide more relevant ads to the user. Tracking cookies from a user’s browser history to service these ads is a common practice to accomplish this relevant placement. This is also known as retargeting. At its core, retargeting is accomplished by increasing the number of data interfaces an ad publisher uses to determine which ads are shown to a user.
Therefore, driven by the objective to increase conversion, data interfaces are intangible assets. Collecting this browser history allows ad publishers to uncover novel patterns, enhance ad relevance, and create new solutions that increase conversion. According to an analysis conducted by Gallup, “companies that apply the principles of behavioral economics outperform their peers by 85% in sales growth and more than 25% in gross margin.”
Data interfaces are just one example. As an owner, you must determine the most valuable intangible assets for your business objectives.
Step 2: Determine How the Most Valuable Intangible Assets Affect Your Revenue Streams
Once you have defined your company’s most valuable intangible assets, you must document the way those intangibles affect your company’s revenue streams. How many events must take place for your intangible asset to create revenue? At J&A, we refer to these as “steps removed” in a process flow. For example, when a user clicks on an ad, the platform owner generates revenue. Therefore, if the intangible asset is a data interface and the presence of more data interfaces increases conversion and revenue, then that asset is one step removed from revenue. Social connections are a more complex example. The presence of social connections on a platform encourages a user to spend more time on the platform, and the more time a user spends on a platform, the more ads the user will click over time. This is two steps removed. The number of steps removed in a process flow completely depends on the business model and business objectives employed. Conversion is important for multiple types of businesses, but the steps between conversion and data interfaces can be drastically different for an infrastructure company and a platform company.
We chose to use revenue in this example because our objective was conversion. Other objectives can include reducing costs, managing risk, or increasing cash flow.
Once you have determined which intangible assets are the most valuable, it is important to measure the outcomes for the selected business purpose over time. Generally, intangible asset data and key performance indicators (KPIs) should be measured for at least one year. Business owners need to determine the right KPIs and track them regularly. The KPIs most related to encouraging conversion are traffic, traffic sources, the technology used to serve ads, and the data that determines when an ad is served.
Knowing how and what to measure is essential to increasing your company’s value. Certain interfaces are more valuable than others. A valuable interface must enhance a desired business objective. Therefore, if your goal is to increase conversion and a certain interface supports that, it is an intangible asset. A popular example of this in the M&A world is Facebook’s purchase of Instagram. Facebook approached Instagram for purchase because Facebook’s application program interfaces (APIs) were increasingly being pinged by Instagram users. Before the acquisition, a Facebook API made Instagram more valuable because it allowed Instagram to use Facebook’s large pool of customer data to enhance its own platform. J&A’s research has also shown that more data interfaces lead to higher purchase price premiums (J&A, “Understanding Ad Tech M&A Value”). Before the acquisition, this integration did not necessarily increase the value of Facebook.
Conclusion About Identifying Intangibles
Measuring important aspects of your business and tying them together with corporate financial statements is powerful. Data analyses conducted for thousands of M&A transactions confirm that they can be used to maximize the transactional value for both sides of an M&A before the sale is closed (J&A, “Understanding Ad Tech M&A Value”).
As a business owner, you can utilize the information herein to maximize your company’s value. When developed correctly, this material can significantly impact the value of your organization. Along with specialized bankers, you are uniquely positioned to develop the relationship between intangible assets and corporate financial metrics. Defining the assets that are valuable and then measuring those assets over time is the simplest yet most effective process you can use to increase the overall value of your company.