IDENTIFYING AND VALUING THE INTANGIBLE ASSETS OF YOUR ONLINE BUSINESS
©2022 Roberto Martins
Intangible assets are just as valuable in online business as they are in a traditional brick and mortar shop. Online activities often have more intangible assets than tangible assets, which includes intellectual properties (IP) and other business assets that have no physical substance, like brands, patents, copyright, licensing, digital assets, distribution contracts, among others. They can’t be touched, moved, or industrially refitted by tangible means. For such reasons, managers, shareholders, bankers, and mergers and acquisition specialists pay close attention to the valuation of the intangible business.
When it comes time to put a value to your business for the IRS, net worth assessment, financing, or to put it up for sale, intangible assets are often significant value contributors. Just what are the intangible assets of your online business? They may include the following:
- Brand related IP: your trademark, logo, packaging, and advertising graphic design, unique packaging shapes, patents, taglines, jingles, photos, website designs, and innovative domain names.
- Support IP: custom software, databases, blog postings, product descriptions, advertising copy and scripts, videos, website URLs and corporate social media, and customer and distributers lists.
- Non-IP related: business social media accounts, influencers contracts, search engines valued links and backlinks, customer subscriptions, brand, and other intangibles value.
You may be surprised to see social media accounts among the non-IP intangible assets of your online business. It’s important to remember that in the 21st-century customer-oriented marketplace, a brand with a significant social media presence and many followers has a higher perceived value from business backers than a brand that doesn’t. Therefore, social media accounts are viable and valuable intangible assets for online businesses.
Facebook, a Meta Company, is still the largest social media platform in the world with about 2.5 billion users. Other social media platforms, including YouTube and WhatsApp, also have more than one billion users each.
These numbers are huge – there are 7.7 billion people in the world, with 3.5 billion of us online. The figures reveal that social media platforms are used by one-in-three people in the world and more than two-thirds of all internet users.
Social media has changed the world. The rapid and vast adoption of these technologies is changing how we find partners, how we access information from the news and corporations, and how we organize to demand political change.
On 25 January 2011, the OECD published the document “Transfer Pricing and Intangibles: scope of the OECD project.” The agency elaborated its recommendations and criteria for Transfer Pricing guidelines, highlighting that intangibles are one of the most challenging topics in the pricing area transference.
With these considerations, the OECD Tax Affairs Committee decided to start a new project to analyze the aspects of intangible transfer pricing, with a view to the proper taxation of member countries on such transactions.
OECD studies do not constitute a manual of technical standards or practices associated with the management and valuation of intangible assets. I see these relevant studies as knowledge resources that can be studied by all the specialists involved in valuing and negotiating intangible assets. The practices proposed by the Uniform Standards of Professional Appraisal Practice (USPAP) are much more eloquent on the classification of intangible assets:
“Intangibles (Business Interests) are nonphysical assets, including but not limited to franchises, trademarks, patents, copyrights, goodwill, equities, securities, and contracts as distinguished from physical assets such as facilities and equipment.”
Certain intangible assets fall under the category of goodwill assets. These are considered hard intangibles because their value can only be achieved under exceptional criteria. In the eyes of many business owners, goodwill intangible assets are wrongly regarded as priceless because many of them usually have been developed over long periods, perhaps generations.
The reputation of your online business is an example, which, per se, cannot be monetized. However, its results (and value) are objectively measured in many forms: Google Analytics tools, Alexa SEO and competitive analysis software, independent products and services agencies evaluations, online magazine analysis, others.
Consider as another example the environmental license of an industry. It is a critical document, which costs a lot of money and time to obtain. It is possible to put a price on it by using the basics of cost approach valuation such as the amount invested in fees, inspections, consultants and records, among others. It is also possible to calculate the future economic losses of benefits due to the time expended on the processes involved, for example, the capital which was lost while the industry could not manufacture without a sort of related documents, including certifications.
There are other intangible assets than those mentioned, depending on the type of online business you own. The point is that intangible assets are essential components of your business and should play a crucial part in its valuation at any moment. Once you identify your intangible assets, you can track their growth and importance to the overall success of your online business, especially if one or more industries are involved.
After the identification and classification of intangible assets, it is possible to study which is the appropriate methodology to perform the valuation, a complex and indepth work as I have mentioned in other articles. According to international best practices widely commented on in the skilled and academic literature, it is accepted that there are dozens of methodologies for appraising intangibles. With the purpose to clarify the public involved, the intangible valuation methods can be organized into three main groups, which generate many variants, but always recurring to them: Income Approach; Market Approach; Cost Approach.
In summary, business owners need to identify the intangible assets associated with their businesses. Recognition of certain intangible assets is essential for accurate business valuation. IRS requirements, net worth assessment, investment, and even future sale possibilities will depend on the measurement and appraisal of these assets.
In an era when only the best global brands are able to successfully compete, online intangible intellectual property such as logos, taglines, and domain names are valuable intangible assets which should be recognized and well managed especially because in the 21st-century global business environment, they also comprehend more evanescent assets like social media accounts, the number of followers, likes and dislikes publication records and so on.