An intangible asset is a resource that exists but is not physical in nature, yet still has the potential to hold enormous value for a business.
Intangible assets are important because they can give your business a competitive edge. For example, if you’re able to nurture a brand that customers have a deeper emotional connection with than competitors, it’s more likely they’ll return, which makes your business more valuable.
In this article, we’ll go on to further define intangible assets, providing examples - as well as offering advice on how they’re valued and which types of intangible assets can be amortised.
What are intangible assets?
Intangible assets can include the following:
- Goodwill
- Company reputation
- Intellectual property, licensing and rights
- Brand awareness
- Customer lists and data
- Research and development
Another intangible asset of increasing importance over the last 20 years surrounds a company's digital presence, which can add incalculable value. For example, London-based acupuncture and osteopathy business MHV Clinic found that a number of viral Instagram posts contributed significantly to its success.
MHV Clinic owner Rishi Patel can be seen in the posts performing osteopathic work on clients, with these posts often reaching over 100,000 views. These social posts have helped raise the company's brand awareness, which in turn helps bring in new customers.
“The brand awareness has been incredible," says Patel. "People from all over the UK have seen our Instagram page and we have attracted clients from all over as a result. It has really boosted our business – we’ve reached so many people we wouldn’t have been able to otherwise."
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Types of intangible assets explained
Goodwill
Goodwill is an important example of an intangible asset. When a company or individual acquires another company and pays an amount above and beyond the value of the company’s assets alone, they are usually paying this premium due to the company’s brand value, reputation or customer loyalty.
Company reputation
For Patel, a good reputation has proved essential for the growth of the business. The MHV Clinic team has developed a good reputation by nurturing client relationships, which helps foster word-of-mouth recommendations. “We deal with clients on a one-to-one basis, and they often come to us in desperate need, so when you help them and improve their quality of life they are immensely grateful," he says.
"This helps us build a positive rapport. As we’ve been in business a while, every year we get more and more clients through word-of-mouth, which shows we are doing something right. It’s amazing when clients refer us to their parents, siblings, colleagues – even members of their sports teams.”
Intellectual property, licensing and rights
Often considered the most valuable asset of any corporation, intellectual property ensures the inventions or innovations of a particular company can be protected from outside use or reproduction.
Intellectual property includes things like patents, trademarks and copyright, which prevent others from developing a similar product or service. For a publisher, for example, copyrights are important to stop others from publishing a book or parts of the book without requesting permission from the author.
Brand awareness
Brand equity surrounds the value of your brand as a whole, and how you leverage an emotional connection with your customers. The more recognisable your brand, the more customers may be willing to pay for its products or services. One mistake smaller businesses can make is not viewing their brand as having prospective asset potential.
Customer lists and data
If a business has insights into things like customer purchasing habits, contact information and marketing preferences, then customer databases can hold enormous value for brands, giving them an edge over competitors.
Research and development
Many businesses spend large sums of money on the research and development of their products and services in order to create new and bespoke products that generate significant income in the future. For this reason, research and development is also an intangible asset.
Tangible vs intangible assets
Unlike intangible assets, a tangible asset is one that you can see and feel. For example, your business premises, equipment, inventory or machinery. One key difference between the two to note is that tangible assets can be damaged or destroyed, and therefore carry a finite value that's likely to depreciate over time.
By contrast, it’s much harder to track and determine the value of intangible assets, which are not physical by nature.
When you start a company, you often depend much more on tangible assets to produce goods or deliver services. As a company becomes more established, it may begin to rely more on intangible assets, which often drive brand value and growth. Over time, some would argue that intangible assets become much more important drivers of value than tangible assets.
Real-world Intangible assets examples
Customer data is an intangible asset that has only grown in value since the internet was founded. Consider, for example, all the data – and resulting reach and influence – that Meta has of the users of its platforms like Facebook and Instagram.
Another real-world example would be brand awareness. Think of Coca-Cola, a brand that dominates the soft drinks industry. This is largely in part because it has managed to nurture its brand equity over the decades, meaning consumers are more likely to recognise it and pay higher prices for it when compared with competitors.
Thirdly, take patents. The reason Pfizer was able to profit so greatly from the creation of the little blue pill was that it patented its chemical formula. If you own a patent, having control of that intangible asset gives you the opportunity to dominate a market - and even when a patent expires, you may well continue to profit as your brand is now broadly associated with the product.
Which intangible assets are amortised?
Amortising intangible assets involves expensing their value over their suspected lifetime. In a similar way to tangible assets, certain intangible assets have a specific lifetime and accountants can track the depreciation of an asset’s value in this way.
Examples of intangible assets that could be amortised over the years include a software licence or patent. A patent may only be useful for a particular number of years, which influences its value. In this instance, the overall value, or cost of the asset, is divided between the remaining years it will last.
Goodwill is a long-term asset that is not amortised because it has an indefinite life cycle. Other intangibles that cannot be amortised – because their lives are dependent on the company duration rather than a set timeframe – include brand name and reputation.
How are intangible assets valued?
The value of intangible assets may not be recorded in the balance sheet. But in the event of a merger or acquisition, the value of intangible assets would be calculated by subtracting the value of all net assets on the balance sheet from the overall valuation of the business. What you’re left with is known as goodwill.
However, intangible assets may be broken down further into their individual components - like customer databases, rights of use and brand equity, for example. Sometimes, the value of these assets can be difficult to ascertain. To put a price on brand awareness, for example, a business may have to think about doing some or all of the following:
- Performing brand recognition surveys and focus groups
- Leverage engagement data using analytics software
- Study your website's traffic and referrals
- Build social media presence and increase following
- Checking how your website ranks against competitors
Accountants will typically use straight-line amortisation as the method for charging the cost of certain intangible assets – this means they would expense it at a consistent rate over time. for example, if a patent is set to last 10 years, the patent cost would be divided and split over 10 years.
As a result, intangible assets can impact the bottom line in some scenarios, which makes them an important consideration for small business owners.
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