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Protecting 80%+ of a Company’s Value

Every business, large or small, wants to protect its assets. What type of protection to focus on is one of the most important ongoing challenges that business owners face.

The term “business assets” still tends to conjure up images of physical items owned by firms, such as product inventory, real estate, and manufacturing equipment. The reality is that these tangible assets make up a smaller and smaller proportion of what businesses actually own.

A Generational Change in Business Valuation

The most recent report by Ocean Tomo, a capital advisory firm, revealed that the average intangible asset value of S&P 500 companies is 84%.

In 1975, that number was 17%.

This represents a radical shift in where the true value of businesses can be found.

According to Investopedia:

An intangible asset is an asset that is not physical in nature. Corporate intellectual property, including items such as patents, trademarks, copyrights and business methodologies, are intangible assets, as are goodwill and brand recognition.

From a legal standpoint, several of those assets (trademarks, goodwill, and brand recognition) can all be grouped together as aspects of trademark law. That leaves patents, copyrights, and business methodologies (the latter being legally classified as trade secrets.)

Click here for a free Intellectual Property for Entrepreneurs checklist

How Does This Apply to Smaller and Midsize Companies?

The S&P 500, of course, includes industrial giants such as Exxon, 3M, and Boeing – companies that control lots of tangible assets. This suggests that small and medium-size businesses, which tend not to list physical items like airplanes and oil refineries on their balance sheets, may find that almost all of their assets are in the form of intangible intellectual property.

The problem is that many business owners don’t act as though these intangible assets are the most valuable items on the balance sheet. For example, they may say that their companies’ trademarks are important, but how much time and capital are they actually spending to protect and enforce those IP rights?

In down times, larger firms can borrow against or sell physical assets to stay afloat. Smaller and midsize companies may not enjoy that kind of flexibility. It’s easy to get distracted by the day-to-day needs of running a business. The assets you can hold in your hand may seem to demand most of your attention. Business owners would be wise to regularly schedule time to review their intangible assets and confirm that they’re doing everything they can to protect what might be the vast majority of their companies’ real value.

Hat Tip to Tyler Cowen (check out his blog Marginal Revolution), whose book The Complacent Class inspired this blog post via its discussion of intangible asset values.

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