Understanding how to determine tangible and intangible business assets is an important step in properly valuing a business. Assets are defined as valuable resources or items possessed by a company. These assets can be further characterized as tangible or intangible, with the distinction being whether an asset is physical (tangible) or non-physical (intangible).

To understand tangible and intangible business assets, you need to look closely at each type of asset.

Determining Tangible Business Assets

When you’re starting to ascertain the difference between tangible and intangible business assets, the easiest place to start is with tangible assets. Tangible assets are items that a business owns that have a physical form. Tangible assets usually have a market and ease of transferability which make them easier to value than intangible assets.

Some common examples of tangible assets include:

  • Machinery
  • Buildings
  • Land
  • Vehicles
  • Inventory

Each item above has a physical component and generates value for a business, which are the defining characteristics of a tangible asset.

Within the tangible asset classification, here are subsets known as current assets and fixed assets.

Current Tangible Assets

Tangible assets that are relatively liquid are classified as current assets. Typically, a current asset is one that can be converted to cash within a year. Current tangible assets are valuable to businesses because it reduces risks and helps maintain solvency.

Some examples of current tangible assets include:

  • Inventory
  • Notes receivable
  • Supplies
  • Prepaid items

Fixed Tangible Assets

Unlike current assets, fixed tangible assets are not as easily converted into cash. These tangible assets typically take longer than one year to liquidate. However, these long-term assets do offer some tax relief in the form of depreciation, as you can lower their value year-over-year in your books.

Some examples of current tangible assets include:

  • Land
  • Building
  • Machinery

Determining Intangible Business Assets

Assets that provide value to a business but do not have a physical form are referred to as intangible. Intangible business assets are much more difficult to assign value to because they lack a direct market to compare against. However, intangible assets do affect the business and determining their value is especially important during a merger & acquisition.

Some common examples of intangible business assets include:

  • Trademarks
  • Domain names
  • Customer relationships
  • Patents
  • Trade secrets

A further example to illustrate the value of an intangible asset on a business is the brand’s logo. Nike’s “Swoosh” logo is one of the most recognizable in the world. Nike originally paid $35 for a designer to create the Nike logo, but the brand is now worth an estimated $29.6 billion.

There is no denying that the Nike logo has a major effect on the Nike brand. So how do you assign a value to the logo? This question is one of the main reasons intangible assets are so difficult to estimate.

Generally, intangible assets can be broken down into two subsequent categories: intellectual property and goodwill.

Intellectual property

Intellectual property (IP) is an intangible asset that plays a large part in determining the value of a business. In an increasingly technology-driven economy, many businesses are being acquired for their technology patents, software, user contracts, and other proprietary information or trade secrets.

While these assets are not physical, they are valuable and can drastically affect the market value of a business. Take Snapchat for instance, Google reportedly offered $30 billion to acquire this technology-driven business. This $30 billion valuation is predominately based on Snapchat’s intellectual property, such as its brand, users, and technology.

Goodwill

Goodwill is another intangible asset and is identified once a business is acquired. Goodwill includes all the unidentifiable assets in your business that led to the acquisition price net the identifiable assets.

Goodwill is present when a company is acquired for more than its fair market value. In other words, goodwill is determined by taking the purchase price of a business and subtracting the identifiable assets — both tangible and intangible.

If you’re in the process of buying or selling a business, then you are likely taking a hard look at tangible and intangible assets. Because assets are the factors that drive a business’s value, its paramount that you understand the characteristics of both tangible and intangible assets.

Want to talk to a Certified Public Accountant (CPA) about business asset valuation? Contact the Tampa CPA Firm, Rivero, Gordimer & Company, today!

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