Introduction
Tangible and intangible assets of the company are essential aspects of business valuation. It not only affects how your company does business but also ensures investors feel the security of their investment. It further points out the importance of a business valuation for the company.
To prioritize both tangible and intangible assets in valuing your business’s growth and success, in this blog, we discuss how to value tangible and intangible assets in business valuation with their importance and examples.
Tangible Assets
Tangible assets are the backbone of your company, consisting of resources in physical form. These include fixed assets such as machinery, buildings, and land, as well as current assets like inventory and cash. Other examples are company vehicles, equipment, IT tools, investments, outstanding payments, and the value of on-hand products and confirmed orders.
These are items with a definite purchase value that your business utilizes to produce goods and services for profit. Mainly, tangible assets are divided into two categories: financial capital and physical equipment, which can be either short-term or long-term.
Importance of tangible assets
Tangible assets are important because:
- It has stable investment value and practical application.
- It is worth and generates income when leased out.
- It may have a lower correlation with other asset classes due to their distinct profile, thereby increasing their chances of securing loans.
- Companies with fewer tangible assets receive less from creditors compared to those with more assets who receive more from lenders.
How to value tangible assets in business valuation?
The following are the methods for business valuation required for evaluating the worth of tangible assets:
1. Appraisal Method
In this method, a valuer determines the fair value of a company's tangible assets. The valuer assesses the current state of the assets, taking into account the outdated possibility of them.
The level of wear and tear is also taken into consideration, followed by an analysis of these aspects against the benefits of acquiring similar assets from the market.
2. Liquidation Method
Liquidation refers to the ability to convert assets into cash, so a company needs to understand the minimum value of its assets. This method ensures that the company gets the right value from a quick sale or liquidation.
As a result, an appraiser is hired to determine the value of how much an auction house or potential buyer will pay for the tangible assets.
3. Replacement Cost Method
This method is used by Insurance companies to evaluate the value of a tangible asset for insurance purposes. This helps in determining the cost of replacing the particular asset.
Intangible assets
Intangible Assets cannot be physically touched and so, do not have an actual presence. Despite not having a physical form, they still hold value for your business and are considered long-term assets.
It means that you will be able to use intangible assets for more than ten years without actually touching them. For instance, your business’s goodwill, patents, copyrights, trademarks, brand names, and customer records.
It is categorized into two main types of assets, namely intellectual property and goodwill. Intellectual property gives you exclusive rights, preventing other companies from copying it. On the other hand, goodwill encompasses various dynamic factors such as your company's reputation, relationships with customers, and employee morale.
Importance of intangible assets
Intangible assets are important because:
- It provides your company with exclusivity through patents, trademarks, and copyrights.
- It improves your company's value and contributes to your strong relationships with customers and employees.
- It also increases potential opportunities for you to align with the top prospects, ultimately securing contracts and patents.
How to value intangible assets in business valuation?
Here are three methods used in business valuation to determine the value of intangible assets of a company:
1. Cost Method
This method can help you in figuring out the current expenses involved in repurposing an asset. It also enables the calculation of the current value of all the initial costs associated with the intangible asset.
2. Market Method
This method enables you to use the value of intangibles from your all intangible assets. It gives a fresh perspective, allowing you to better value your intangible assets.
3. Income Method
This method is known as the business valuation method to evaluate your business in terms of the income it generates. It assesses the expenses involved and the expected future earnings.
Risks and financial investments play a significant role in determining the value of the business. When using this method, you must carefully estimate the potential returns that intangible assets will generate in the future, and use effectively the estimated cashflows.
Conclusion
Thus, tangible assets showcase your company's financial strength, while intangible assets help in evaluating and enhancing relationships, leading to both moral and financial success.
It is essential to balance and give equal importance to both of them for the overall prosperity of your business. Understanding the significance and role of both tangible and intangible assets in business valuation, you can now choose the right business valuation firm to value your business’s tangible and intangible assets.
If you still need guidance regarding business valuation, then you can consult with our expert valuers. At My Valuation, we provide the best business valuation services in India across industries. Our renowned valuation services include start valuation, business valuation, ESOP valuation, and more.
Contact us today and get in touch with the best business valuation firm in India.
