Understanding boardroom decisions about intangible property

Intangible assets are valuable, but how can directors be sure they are bringing perspective and understanding to boardroom decisions about an organisation’s intellectual property? Michael Masterson, principal of advisory firm Intrinsika and a director of the Cure Brain Cancer Foundation, explains.

Accountants refer to them as “intangible assets”. Lawyers prefer “intellectual property”. These non-physical assets account for 90 per cent of a company’s worth (2020 Ocean Tomo IAMV study). However, only a tiny proportion of them hold actual intrinsic value.

1. One per cent holds the secret sauce

Masterson describes 90 per cent of intangible assets as “highly replicable” — so they drive less value. “The next nine per cent are intrinsic assets that contribute to the overall value of the business by volume. But in most organisations we work with, the one per cent of their volume of non-physical assets is typically where 90 per cent of the value is. That one per cent is their strategic intrinsic assets.”

These intrinsic assets take many forms. In the case of Google, its most valuable intrinsic asset may be its trade-secret search algorithms. For Apple, it may be design. “For Coca-Cola, it’s certainly its brand,” says Masterson. “I have never heard anyone at a bar order a bourbon and Pepsi.”

2. A marker of potential

Market value is an indication of the current or previous year’s revenue or profit. Intrinsic value is a marker of business potential. Strong intrinsic assets can lead to increased revenue as well as greater margins and/or market share. Investing in them will drive a higher return.

“The first thing you need to do is work out what those intrinsic assets are. If you have a high margin or market share, the question is, what’s driving that margin or market share? You work backwards from there. What makes you special?”

He suggests developing an intrinsic asset register. What’s driving the intrinsic value in your organisation? Your content? Your relationships? Your business know-how? “Think of the register in the same way as a fixed asset register, but the content will be more valuable.”

3. Context and timing

Masterson says data is only valuable in the context in which it’s used. “People talk about data as the next gold, but it’s more akin to dirt in that you can grow something in it, dig something out of it or build something on top of it. Data in and of itself is often not that valuable. The value of intrinsic assets to you may be very different to their value to someone else, because they are highly contextual.”

Timing can also shape the value of intrinsic assets. “They can be valuable one day and not so valuable the next.”

4. Future value must be protected

Risks to intrinsic assets include staff turnover, as know-how may leave the building with former employees. Market expansion may also present new competitors, or a collaboration may result in conflict over creative ownership. “A primary fiduciary responsibility of a director is not necessarily to grow assets, but to protect them,” says Masterson, adding that when intrinsic assets have been identified, you can work out the risks and how to safeguard them. He suggests putting someone in charge of them, citing the example of roof rack company Rhino-Rack, sold in 2021 to Nasdaq-listed Clarus Corporation.

“It was the first company we’re aware of to have a chief intrinsic asset officer. They thought the company was worth $100m. We helped them identify that they didn’t own its major asset — the end-user customer base. The company prioritised end-user data collection and Clarus bought them for $255m. That increase came because it was able to capture that end-user data.”

5. People will only pay for things they understand

Explaining the worth of an intrinsic asset — to stakeholders or to potential investors — can be challenging. “One of the most contextual elements is what the asset is worth to you, rather than what it’s worth to someone else. You need to be able to explain the value, because the number may mean different things to different people.”

Masterson cites the example of a listed client preparing to form a $50m joint venture with a US firm. He determined the client should contribute less cash to the deal because of the higher value of their intrinsic asset contribution. “It saved our client $22m on that joint venture. If you don’t know what your intrinsic assets are worth in a specific context, you’re never going to include them at fair value.” 

This article first appeared under the headline 'How to Value What You Can’t Hold’ in the September 2024 issue of Company Director magazine.