If you look at the top ten most valuable public corporations in terms of market capitalization as listed by Forbes in 2016, you will find most if not all of their names to be quite recognizable. These top ten companies in order of value from greatest market cap to lowest are: Apple, Microsoft, Google, Coca-Cola, IBM, McDonald’s, Samsung, Toyota, General Electric, & Facebook.
The current most valuable is Apple, Inc., which has a current market capitalization value based on shares outstanding as of 9/30/2017 of $873 Billion. However, if you look up Apple’s balance sheet as you can for any public company, total assets on 9/30/2017 are listed as $375 Billion. After subtracting outstanding liabilities, net “tangible assets” or balance sheet “net” value is stated as $126 Billion. Where is the difference of almost $750 Billion in value coming from? The “intangible” value of knowledge-based capital!
While Apple is a public company, the concept of knowledge-based capital as an intangible asset is the same across businesses of all sizes. Certainly some businesses have more than others, but the idea of an intangible asset is not a new concept. It is often referred to as “goodwill” in privately held businesses.
In years past, business value was derived more from physical assets: land, natural resources, human and machine labor. But, technology has disrupted that entire system. Today, business value is created by a business’s ability to create, transfer, assemble, integrate, and exploit knowledge assets. Knowledge has now become the single most important factor of production; managing intellectual assets has become the single most important task of business.
Business owners track their balance sheet, which is derived from an accounting system that generally tracks tangible assets only. It can’t track all the intangibles because it was never set up to do so. But, that is where the majority of your business value exists. The financial reporting systems we still use today were set up for the economy of the 1950’s - not the high-tech knowledge based economy that exists today.
It is no longer enough to simply introduce a new product, grow revenue, or cut expenses. Today’s knowledge-based economy rewards business owners who build brand value. If one is going to build brand value, one needs a new scorecard because the old one isn’t working.
In his book “Walking to Destiny” 11 Actions An Owner Must Take to Rapidly Grow Value & Unlock Wealth, author Chris Snider describes a methodology he has defined as the five stages of Value Maturity and in order of action are: Identify Value, Protect Value, Build Value, Harvest Value and Manage Value.
Consider the five stages to value maturity as your new “intangible asset” scorecard. Score yourself at each stage by measuring how well your business is doing in each of the following four categories called the 4 C’s: 1) Human Capital, 2) Structural Capital, 3) Customer Capital and 4) Social Capital. Paying attention to these intangibles in your business will go a long way towards increasing the value of your company. Business value creation in the 21st Century is achieved by one’s ability to identify, protect, build, harvest and manage the value of your intangible assets broken into categories of intellectual capital.
Owners of businesses who want to maximize their business value would be well-served to focus on assets not included on their balance sheet called intangibles.
Thinking back to the top ten public corporations listed at the beginning of this article, one could say they represent “Best in Class” in one or more of the 4 C’s. How would you score your intangible business value?
In my next article, I will go into more detail on each of the five stages of value maturity.
DOFU 11/2017 TN 1954388