Learn How to Accelerate Through Due Diligence During an M&A or Private Placement
Part 3
Monetizing Intangibles in Ad Tech M&A Value
In this article, we will briefly explain how to monetize intangibles.
In the first two articles of this series, Identifying Intangibles in Ad Tech M&A Value and Developing Intangibles in Ad Tech M&A Value, we specified how you, the business owner, can identify and develop your company’s most valuable intangible assets to maximize your value.
In any M&A deal, sellers highlight the importance of their intangibles so the buyer can use them to create a competitive advantage. The third step in this process, learning how to monetize your business’ intangible assets, is where you reap the fruits of your labor. This step occurs when the buyer pays a price for the intangibles you have identified and developed. This includes the steps leading up to the sale, such as valuation, negotiation, pitching, and due diligence. So how do you monetize intangibles?
How to Monetize Intangibles When Selling Your Company
An M&A valuation can be conducted in several ways, including through a business appraisal or the valuation of a public company’s stock. The valuation of your company often amounts to a number that is negotiated between the seller and the buyer. Middle-market companies in particular possess a range of values based on the buyer’s profile. Fair market valuation is the most common valuation technique.
Fair market valuation occurs when you determine how similar businesses have sold based on multiple types and multiple factors. Multiple types include earnings before interest, taxes, depreciation, and amortization (EBITDA), annual recurring revenue (ARR), and, in some cases, book or tangible asset value. Multiple factors (referred to as 3X, 4X, or 10X) simply identify the number you agree to multiply the selected factor by to determine the valuation number.
Obviously, multiple types and factors depend on industries with similar characteristics to the company being valued. For example, industry growth, the strength of the management team, competitive advantages, access to suppliers, and access to buyers can all influence multiple types and factors.
How to Use ASC 805 to Maximize Your Valuation
The Accounting Standards Codification (ASC) 805 allows the business owner to understand how the expected purchase price can be broken down based on the transaction’s fair market valuation and associated purchase premium or goodwill. In the ad tech industry, the amount paid for goodwill makes up, on average, 70% of the purchase price. This means, for example, that a company with a fair market valuation of $100 and 70% goodwill was purchased for $170.
At J&A, our banking practice conducts detailed M&A studies of goodwill and purchase price allocation to understand why companies command a premium and how business owners can make sure they land at the top of valuations when selling their businesses. After looking at over 500 M&A transactions executed by technology giants over a six-year period, we segmented purchases by industry and certain goodwill parameters, narrowing our study to 34 purchased companies. These 34 ad tech M&A transactions completed at the greatest premiums had the following two things in common: the target company increased the data interfaces of the acquiring company and the target company increased the data processing power of the acquiring company.
Data interfaces and data processing power are both intangible assets. These intangibles were systematically identified and developed by the business owners over time before they sold their companies. The monetization of those assets became effective when the companies were purchased at higher than average premiums.
This analysis becomes the cornerstone of an effective M&A strategy. Armed with the framework of identifying, developing, and monetizing intangible assets, business owners have a predefined plan they can take to increase their company’s value.
As a business owner, you should always study different purchase premiums in your industry to identify drivers that will create the highest return for your business. Using ASC 805 principles to uncover M&A value allows you to create a roadmap that will help you land on the high end of valuation because it is a scientific way to tie your valuation to intangible assets.
The Takeaways of Intangible Asset Monetization
Intangible assets can only be monetized if you have measured them in-depth. There is an infinite number of intangible assets you can identify, develop, and monetize.
As a business owner, you must determine which ones you can leverage most effectively. Trusted advisors can help you create a clear vision and strategy to maximize your company’s value. The role of intangible assets in M&A markets will increase over time. The most successful companies will use the information presented in these articles to maximize the value of their company.
Part I: Identifying Intangibles in Ad Tech M&A Value >
Part 2: Developing Intangibles in Ad Tech M&A Value >
Photo by Vincent Tantardini on Unsplash
Part 2
Developing Intangibles in Ad Tech M&A Value
In this article, we will briefly explain how to develop intangibles.
In our earlier article Identifying Intangibles in AdTech M&A Value, we explored how you, as a business owner, can identify the intangible assets that make your company more valuable during the M&A process. After identification is complete, the next step is to develop those same intangible assets. Developing intangible assets relies on key performance indicators (KPIs) in the same way identifying intangibles does. KPIs are the metrics you choose to represent the performance of an intangible asset.
Developing an intangible asset is the set of actions you will take to optimize a KPI. For example, we previously explored how more data interfaces can lead to optimized conversion. Therefore, the intangible asset is the data interface and conversion is the KPI. Optimizing conversion means increasing or decreasing it based on drivers like technology, advertising spends, or advertising quality.
To measure conversion, you must define the desired final action you wish your customer or visitor to take. This could include clicking an ad, buying a product, or providing an email address. The development of the intangible asset (e.g., data interfaces) becomes any action, investment, or improvement you perform to accomplish the final objective (e.g., click, buy, provide email). These developments increase M&A value. In our next article, Monetizing Intangibles in Ad Tech M&A Value, we will show you how to monetize them.
There are multiple ways to develop an intangible asset. Building a company for sale requires considering accounting and banking principles as well as intuitive, strategic ones. Imagine a company that performs direct digital marketing. If this firm wants to increase the number of people who click ads served to drive more website traffic, they have several options to encourage their users to do so:
- Create more compelling marketing content and design
- Acquire new contact information of people who are more likely to click the links in the body of the message
- Retarget consumers by making sure prospects are seeing ads in multiple locations and in multiple instances
- Invest in new technology that places more relevant ads in front of potential “clickers”
- A combination of some or all of the above
The best choice for the company is likely a mixture of the five options laid out above. The company must understand that each choice represents a distinct set of intangible assets, all of which are inherently identified and developed when the decision is made. The investments made in one, some, or all of these options are a part of “developing” the intangible asset. The intangibles must be measured and monitored so they can increase corporate value at the time of M&A.
As a business owner, how you choose to develop an intangible asset affects the accounting options available to your management team. Capitalization is a common technique for recording expenses as assets to minimize long-term costs. Specific rules exist about how and when to capitalize expenses that overlap with the development of the intangible assets recommended here. For example, you can capitalize costs to develop patents, copyrights, trademarks, and even proprietary software intangibles, but those costs must be recorded correctly. You cannot simply download a credit card statement 11 months after the expenses were incurred and then claim them as assets.
The principles of identifying and developing intangibles are relevant to business owners because they tie together strategies for growth, development, accounting, and exits. When used correctly, they break down silos between business units and bring together the operation and value of a business. Most venture-capital investors wait for companies to be purchased so the investor can then achieve liquidity. All owners desire M&A options for their hard work. Developing intangibles is the only way to combine the traditional business operations of growing, scaling, and building a company with the gritty accounting principles that affect the valuation and closing of an M&A deal.
Companies are rarely acquired with the intention to conduct business the same way it was conducted before the purchase. Therefore, it is important for you, the seller, to highlight the most valuable intangible assets of your business through their development and investment. This allows the buyer to utilize these intangibles to their own advantage. Ad tech companies are driven by these intangible assets, such as data interfaces, and new technology development that engages specific customers. Measuring these intangibles through the life cycle of the company will affect your exit valuation, creating a more accurate picture of what a buyer is ultimately paying for.
Part 1: Identifying Intangibles in Ad Tech M&A Value >
Part 3: Monetizing Intangibles in Ad Tech M&A Value >
Photo by Alice Achterhof on Unsplash
Part 1
Identifying Intangibles in Ad Tech M&A Value
Identifying Intangibles is the first article in our series about intangible assets.
Part 2: Developing Intangibles in Ad Tech M&A Value >
Part 3: Monetizing Intangibles in Ad Tech M&A Value >
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.
Part 2: Developing Intangibles in Ad Tech M&A Value >
Part 3: Monetizing Intangibles in Ad Tech M&A Value >
Photo by Neven Krcmarek on Unsplash
Enhance Your Company’s Strategic Assets to Increase Value
What are a Company’s Strategic Assets?
A company’s strategic assets sit at the intersection of tangible and intangible assets and create recurring benefits, are unique, and difficult to imitate. Such strategic assets can include intellectual property, customer relationships, proprietary business processes and algorithms, novel revenue streams, and brand value.
Why focus on strategic assets?
The definition of strategic assets is related to the accounting term goodwill, which is an intangible asset that results from the acquisition of a company at a premium value. The premium is the amount an acquiring company pays for a target company in excess of the target company’s book value. Strategic assets have historically been difficult to quantify, but are known to make a company more valuable.
Corporate buyers have been placing increased emphasis and value on strategic assets compared to tangible assets like property, equipment, and manufacturing facilities. Corporate resources applied to build a robust set of a company’s strategic assets are increasingly providing a higher return on investment than those focused strictly on earnings growth.
High-profile transactions such as Facebook’s acquisition of WhatsApp, AT&T’s purchase of DirecTV, and Campari’s acquisition of Wild Turkey all demonstrated the high percentage of purchase price allotted to goodwill due to the seller’s strong set of strategic assets.
According to research by Carol Corrado, “companies put far more money into non-physical assets, such as customer databases, than in building new factories. In 2014, companies invested the equivalent of 14% of the private sector’s gross domestic product in intangible/strategic assets. The investment in physical assets was about 10% of that sum, which is essentially the reverse of 40 years ago when 13% of the private sector GDP went to tangible/physical assets and only 9% to intangible/strategic assets.”
There is currently more than $2.5 trillion in goodwill on corporations’ balance sheets (source: Time magazine). Why? As corporate awareness of intangible asset value is increasing, fewer companies are pursuing acquisitions to add production facilities and other tangible assets. For example, when Microsoft bought LinkedIn, it was almost exclusively for their intangible and strategic assets, such as their brand, website platform, user/customer data, and perhaps the management team and their connections (e.g., Reid Hoffman!).
How to determine which company’s strategic assets to pursue?
Over the past few months, Gates and Company, in conjunction with Jahani and Associates, have been working to determine the strategic assets that help companies achieve premium valuations that can be identified and developed. Knowing that the concept of strategic assets would not benefit every business, and would certainly vary sector by sector, the team began by reviewing M&A deals in the tech sector. Over 500 transactions that closed between 2010 and 2016 were analyzed to determine strategic asset characteristics and goodwill drivers.
Some of the tech M&A deals reviewed for this initiative included:
- Google acquired Waze for $969 million and allocated $843 million to goodwill
- Yahoo! paid $990 million for Tumblr, with $750 million going toward goodwill, including $182 million for customer contracts and relationships
- Facebook’s $17.2 billion acquisition of WhatApp had an astonishing $15.3 billion recorded as goodwill
- Microsoft acquired LinkedIn for $27 billion and allocated $16.7 billion of its purchase price to goodwill; and when it acquired Skype for $8.6 billion, $7.1 billion went to goodwill
In each of these examples, the target company’s strategic assets (IP, customer relationships, brand, etc.) were valued significantly higher than their tangible/physical assets (plants, property, equipment, etc.). Results from the tech sector analysis indicated that companies with recognizable strengths in social media, web advertising, and data analytics consistently received valuations above market. Additionally, an active user/subscriber base was a driver in over 60% of the acquisitions.
Corporate leaders, business owners, and investors face a critical issue: in order to maximize value, they must enhance the set of strategic assets in their company and/or portfolio of businesses. A thorough analysis of transactional data to identify strategic asset characteristics and goodwill drivers must be considered in conjunction with corporate core competencies, market dynamics, and economic trends to build out the most relevant value-enhancing strategic assets.
About Gates and Company
With offices near Philadelphia and Munich, Germany, Gates and Company is an investment banking and management consulting firm dedicated to helping companies grow. With an impressive track record of helping numerous companies reach their goals, Gates and Company specialize in M&A, market research/analysis, growth strategy formulation, business plan development, product/venture launch, and financial advisory services.
Gates and Company’s management consulting team has invested significant time and resources to refine and validate its methodology of determining strategic asset characteristics and goodwill drivers in the tech sector. Current efforts are underway in the health IT sector. By reviewing market dynamics and hundreds of M&A deals on a sector-by-sector basis, Gates and Company offer these insights to their clients so they can better understand how to identify and develop an optimized set of strategic assets. Gates and Company’s investment banking team helps companies seeking liquidity with comprehensive M&A services to sell businesses or business units, including identifying and assessing those potential buyers most likely to be attracted to a company’s current and developing set of strategic assets.
For more information about Gates and Company, visit gatesandcompany.com.
Company’s Strategic Assets to Increase Value Articles
The Hungry for Health Games: Aligning Strategy and Competitive Advantage
Jahani and Associates analyzed over 200 M&A transactions and equity investments in digital health from 2013 to 2016. We mapped a selection of these companies onto a four-quadrant plane to understand their natural differentiators. We considered both the scope of care delivery (for example, an urgent care company versus a software analytics company) and the size of the company’s financials and number of employees.
Quadrant 1: Social Players
These companies typically have a large customer base, but are relatively lean due to the simplicity of their products. These are socially themed companies, like FitnessKeeper and b.well.
Quadrant 2: Analytic Leaders
These are software-dominated companies that built their businesses by providing automation, simplicity, and streamlining to the data-rich and complex USA healthcare ecosystem.
Quadrant 3: Agile Players
Our research indicates that these companies are in the process of competing to transition to quadrant four. They have strong customer relationships and are starting to scale.
Quadrant 4: Tomorrow’s Healthcare Providers (THP)
THPs are the dominant players of today and tomorrow. These are companies that have a proven ability to scale, are generally profitable, and have strong brands. They are challenged to increase their competitive advantage by generating new, innovative digital health products or by acquiring other innovative companies.
Jahani and Associates work with digital health companies to identify, develop, and implement their competitive advantage powered by intangible assets.
You may also be interested in our article Part 2: Developing Intangibles in Ad Tech M&A Value.
Also you can read our article Identify, Develop, and Implement Intangible Assets to Maximize Your Value.
How Do I Maximize My Company’s Sale Price? (I’m a Business Owner)
Jahani and Associates have been asked “How do I maximize my company’s sale price?” time and time again. The answer is always simple but the execution is never easy. Owners looking to sell their company must understand the fundamental dynamics of identifying, developing, and monetizing corporate value.
An acquisition price includes five parameters: tangible assets, intangible assets, cash, liabilities, and goodwill. Companies maximize their value by creating clarity around cash and tangible assets, having clean and transparent financial statements, and pitching themselves in a way that demonstrates sustainable value.
But that is not the key to maximizing your company’s sale price. The facts show that the vast majority of investment decisions are made based on intangible assets and goodwill. Through extensive research and market experience, Jahani and Associates have identified goodwill drivers specific to a company’s industry and competitive advantage. Whether you are selling to a mid-market private equity company or selling to Apple, you will maximize your company’s value by increasing transparency around intangibles and goodwill drivers.
Jahani and Associates will identify, develop, and monetize your high-value intangible assets and goodwill drivers to maximize your company’s sale price.
Intangible investments have been dominating the industry since 1995 and the subsequent dot-com boom. Intangible assets are consistently undervalued, particularly for small companies at the mercy of large players. This is where we come in.
We utilize our intangible asset framework to systematically and rigorously maximize a company’s sale price.
The process starts well in advance of the transaction execution date to definitively build and identify value. Business owners will maximize their company’s value by partnering with Jahani and Associates, an investment banking firm that understands the true value of a company and how to maximize it.
Read our article: Identify, Develop, and Implement Intangible Assets to Maximize Your Value
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