Even if you keep your company’s financial records in accordance with the Generally Accepted Accounting Principles (GAAP), the value of key intangible assets may not be clear.
Unless, that is, these assets were acquired as part of another business purchase. In fact, GAAP rules state that business owners can’t record the value of internally developed intangibles on their financial statements!
Yet for many businesses the value of these “home-grown” intangible assets far exceeds the worth of the assets shown on their cost-basis balance sheet.
Think about the key vendor and distribution agreements, customer lists, brand names and intellectual property the business has developed.
Lumping the value of all business intangible assets into goodwill may not be a good idea. If you buy a business and plan to reduce the tax burden by asset depreciation quickly, allocate part of the business purchase price to the assets that have a short life.
However, under GAAP, business goodwill is not amortized over a fixed time period. Instead, it is handled by the so-called impairment rules as described in SFAS 141 and 142. Allocating much of your business purchase price to goodwill can slow down your cost recovery through depreciation considerably.
Valuing your business intangibles is worth the effort
Knowing the value of your business intangible assets is important for a number of reasons:
- To determine the overall value of the business.
- To allocate the business purchase price in a tax-advantaged way.
- To identify opportunities for additional royalty income.
- To determine the value of business partner contributions in a joint venture, merger or business spin-off.
It is a good idea to estimate the value of your business intangibles and keep this important information in separate records, in addition to your financial statements.