If you’re like many small businesses, you account for company assets that you can see and touch. But, what about the items of value that aren’t physical? You may be undervaluing your business by forgetting your intangible assets. What are intangible assets?
What are intangible assets?
Intangible assets cannot be touched. While intangible assets do not have a physical presence, they add value to your business. Intangible assets are long-term assets, meaning you will use them at your company for more than one year. Examples of intangible assets include goodwill, brand recognition, copyrights, patents, trademarks, trade names, and customer lists.
You can divide intangible assets into two categories: intellectual property and goodwill.
Intellectual property is something that you create with your mind, such as a design. You have rights to your intellectual property, and other companies cannot copy it. Intellectual property includes trademarks, patents, and licensing agreements.
Goodwill measures several factors that affect your brand’s value. Examples of goodwill include your company’s reputation, strategies, customer base, and employee relations.
Do you know what intangible assets you have at your small business? Take a look at this list to check:
- A strong, recognizable brand identity
- Trained employees
- Loyal clientele
- A reliable vendor and distribution network
- A functional website
- Your in-house technology, systems, and processes
You can divide assets into two groups: intangible and tangible. Tangible assets are items of value that you can touch. Examples of tangible assets include furniture, computers, buildings, and vehicles.
Sometimes, it’s hard to tell whether an asset is tangible or intangible. Tangible and intangible assets often connect to each other. That can make determining value difficult.
For example, you might keep a customer list on your computer and print it on paper. The paper itself is tangible. You can hold it in your hands. But, the actual item of value is not the piece of paper. The item of value is the list. Since the information holds value, the customer list is an intangible asset.
Valuing intangible assets
Usually, you can find the value of tangible assets as a definite number. You add up the value of each tangible item for a total value. But, the value of your tangible assets does not reflect your business’s total worth.
Finding the value of your intangible assets is more difficult than tangible assets. It’s likely that your intangibles do not have cut-and-dry values.
If you plan to sell your company, you will need to include your intangible assets in your small business valuation. You should consult a business advisor to help you value assets. Additionally, you can use methods to understand the value of your intangible assets.
Cost method: You calculate the cost it would take another business to duplicate your intangible asset. For this method, you can estimate the present-day costs required to recreate the asset. Or, you could calculate the present-day value of all the original costs that went into the asset.
Market method: You find another company’s brand, or another intangible asset, that compares to your business. Use the value of their intangibles as a point of reference for valuing your intangibles.
Income method: You measure the future benefits the intangible asset will bring to another business. You need to use cash flow projections for this method.
Recording intangible assets
Accounting for intangible assets has some unique requirements. You record intangible assets on the balance sheet. You only record an intangible asset if your business buys or acquires it. Also, the intangible asset must have an identifiable value and a long-term lifespan. You do not record intangible assets that you create within your business.
For example, your logo is an intangible asset that holds value. But, you created the logo within your business. You did not buy the rights to the logo from another company. You will not record the logo on the balance sheet.
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This article has been updated from its original publication date of October 25, 2016.This is not intended as legal advice; for more information, please click here.