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New
business realities of change
By
Ruchi Gunewardene
The business environment in 2008 is drastically
different to that which existed previously. The global
events over the last two months have been so profound
that it will impact all of us, whatever we maybe doing,
in some way or another, and we will be forced to do
business in a new and different way.
The recent global financial crisis had such wide spread
impact (caused by the unregulated free market economies),
that it has propelled a charismatic African-American
to the highest office in the biggest economy of the
world; an event that was unthinkable just a few years
ago.
As the world economies await to price in the effects
of the unfolding global credit and banking crisis, these
challenging times forces all businesses to rethink the
way they operate. The instinct for most companies is
to hold off investments and cut back on spending.
But, what is clear to some is that these are times when
businesses need to change. Doing business the same old
way is not an option anymore. Doing new things and doing
it differently is essential for survival in the future,
as the impending recession really begins to bite in.
So, looking ahead of the curve and realigning the organisation
for the future is going to be the key for survival.
The result of this is that there are good bargains to
be had during an economic downturn. These bargains are
usually driven through the value of the assets the companies
own. However, what many businesses do not realise is
that they need to look beyond their tangible assets,
and focus on the intangibles they have built up over
the years. Whether you are a buyer or a seller, there
is a huge opportunity for leverage there.
This is perhaps the most appropriate time for companies
to review; to take stock of their intangible assets
and brands, to be astute in brand investments, to realign
the business portfolio, if necessary. Companies with
the courage to go against the grain, which can cut through
the market noise of gloom and doom, will find worthy
investments and utilise this time to strengthen their
intangible portfolios.
Definition of intangible assets
An intangible asset is, an identifiable non-monetary
asset without physical substance held for use in the
production or supply of goods or services, for rental
to others, or for administrative purposes. According
to international accounting standards, the definition
of an intangible asset requires it to be:
A) Non-monetary
B) Without physical substance
C) Identifiable
In order to be identifiable, it must either be separable
(capable of being separated from the entity and sold,
transferred or licensed) or it must arise from contractual
or legal rights (irrespective of whether those rights
are themselves, separable). Intangible assets can be
broadly grouped into three categories:
(1) Rights: Leases; distribution agreements;
employment contracts; covenants; financing arrangements;
supply contracts; licences; certifications; franchises.
(2) Relationships: Trained and assembled workforce;
customer and distribution relationships.
(3) Intellectual property: Trademarks; patents;
copyrights; proprietary technology (eg: formulas; recipes;
specifications; formulations; training programmes; marketing
strategies; artistic techniques; customer lists; demographic
studies; product test results; business knowledge –
processes; lead times; cost and pricing data; trade
secrets and know-how).
In addition, there is what is sometimes termed ‘Unidentified
Intangible Assets’ including internally generated
goodwill (or, going concern value). It is important
to recognise the distinction between internally-generated
and acquired intangible assets. Current international
accounting standards only allow acquired intangible
assets to be recognised on the balance sheet provided
that they meet the above mentioned criteria. i.e.; the
internally generated intangibles of a company cannot
be explicitly stated on its balance sheet.
This result is what is sometimes described as ‘internally
generated goodwill.’ This is the difference between
the fair market value of a business and the value of
its identifiable net assets. Although not an intangible
asset in a strict sense (i.e. a controlled ‘resource’
expected to provide future benefits), this residual
value is treated as an intangible asset in a business
combination when it is converted into goodwill on the
acquiring company’s balance sheet.
Intangible assets that may be recognised on a balance
sheet are typically only a fraction of the total intangible
asset value of a business, with the remaining value
continuing to be classified as ‘goodwill.’
The way forward
An understanding of intangible asset value (including
brand value) is essential to various decision-makers
in various ways: Deal makers increasingly need to gauge
the investment value and value potential of intangible
assets and brands in assessing the merits of a transaction.
Finance Managers are faced with impairment risks as
well as transfer pricing considerations that require
an understanding of intangible asset values. They also
play a role in protecting brand value by maintaining
adequate levels of brand investment in bad and good
times.
Marketing managers need to understand how brands influence
consumer perceptions and behaviour in order to develop
strategies that optimise market performance and brand
value.
Leveraging intangibles
Branded business valuation and dynamic scenario
analysis that can be conducted around it are closely
aligned with the CEO/CFO agenda of enhancing shareholder
value. Such techniques can be used to influence the
allocation of resources, business and brand strategy.
In addition, the outputs from this analysis will be
useful to the investment community to understand and
substantiate the role of the intangible assets in generating
value.
The brand valuation gives a top line measurement of
economic performance driven by the brand, which states
the overall worth of the brand.
The key aspect however, is to look beyond the valuation
as a stand alone number and understand what drives brand
value: Intangible earnings (the cash flows of the business
not associated with tangible assets).
Business considerations
As companies begin to look for opportunities from
this perspective, the need to carry out a proper due
diligence by both the buyer and seller is paramount.
For sellers, they may well be undervaluing their business,
if they have not factored the intangible assets through
a technical valuation. The buyer on the other hand will
be able to get a better assessment of the value of the
business to be purchased with a much more holistic approach.
It will enable him to asses whether he is over paying
for the asset or, if it is in fact under valued (a bargain),
once the impact of it has been assessed in the merged
business. A combination of the increasing economic significance
of brands, and the new international accounting and
corporate governance standards (IFRS3), have increased
the importance of initiating a well-informed discussion
on the value that brands deliver to businesses.
The goal of the Brand Finance Brand Index, which is
now published in April each year, by Brand Finance Lanka,
in the LMD magazine, in fact contributes to this discussion,
by providing an overview of how brand value can translate
to superior business value.
(The writer is the Managing Director of Brand Finance
Lanka)
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