M&A Insights: Use Power of Intangibles to Maximize Your Company Value
M&A Insights: Two kinds of intangible assets
In the world of investment banking, there are two kinds of intangible assets. The first is known as “identifiable” intangibles. These are things like patents, trademarks, copyrights, and customer relationships. In short, these are intangibles that GAAP and FASB have determined are consistent enough to be subject to specific valuation rules. When valued these assets are referred to as “intangible assets.”
The second category of intangible assets is known as “unidentifiable” intangibles. These are essentially everything else. Examples include: Selection algorithms (Netflix, Amazon, and Hulu), operational synergies, talent, and other business combination advantages. When valued these assets generally fall under goodwill. Goodwill is defined as the amount over fair market value an acquirer pays for a target company.
These two kinds of intangibles play a significant role in the valuation of a company. In fact – Jahani and Associates analyzed over 500 M&A transactions among tech giants such as Apple, Alphabet, Facebook, and Microsoft to determine exactly how much value was placed in these categories. The results were astounding.
Intangible assets represented 22% of the money spent on acquisitions for these tech giants. Goodwill accounted for 77% of the money spent on acquisitions from 2010 – 2016. Together, identifiable and unidentifiable assets made up 99% of the purchase price for all acquisitions made by tech giants from 2010 – 2016.
M&A Insights: maximizing a company’s value
These results are astounding to say the least. They are astounding for two reasons: 1) It provides a clear and measurable path to maximizing a company’s value and likelihood of being acquired by a tech giant and 2) it provides insights about why a tech giant will buy targets based on their business model.
M&A Insights: The way a company uses this information, and the unique value Jahani & Associates brings to our clients’ business, is based on three factors:
- The industry vertical of the target
- The specific business processes that are congruent with those of selected acquirers
- A proprietary and data-driven investment banking process
Owners of candidate businesses must consider these factors when building their business. The considerations play a significant role well outside of the traditional investment banking timeline. Meaning the business owner must identify, develop, and implement these intangible assets more than 12 months before they plan to sell their company.