Many parties overlook intangible assets when acquiring a business. Instead, buyers generally focus on how much and how soon they could generate income with fixed assets, property and equipment.
However, purchasing a business goes far beyond what’s inside a brick and mortar. An established business, for example, often comes with intangible aspects like brand and reputation. Others may, for instance, include several types of intellectual properties.
Conducting due diligence
Either before placing an offer or before removing contingencies, a buyer should always perform due diligence that looks past a company’s balance sheet. The CFA Institute, an online source for investment management professionals, indicates the importance of reviewing a business’s intellectual properties, customer contracts and goodwill.
The value of “goodwill”
The standards promoted by the U.S. Generally Accepted Accounting Principles define a company’s “goodwill” as a value that exceeds the cost of acquisition. Potential profits from a company’s goodwill may result from the net amount of the acquired assets and assumed liabilities.
Exploring intellectual properties in purchase agreements
In addition to goodwill, negotiating a final purchase agreement may include the value of the company’s individual intellectual properties. Entrepreneur.com indicates that some asset purchase agreements may cover details of a company’s intangible assets. Intellectual properties include a business’s trade secrets along with trademarks or copyrights. However, each purchase agreement differs. Without this information, buyers could lose out on a company’s real value – for better or worse.
A greater degree of due diligence may be required but, in the long run, will pay off for any buyer.