Building Intellectual Capital
What makes your business valuable to potential buyers? What factors can increase your business valuation? Tangible assets such as land and equipment are only a small part of what makes your company valuable. Often intellectual capital, the intangible part of a business, is incredibly valuable and can account for the largest portion of a business’s valuation.
Intellectual property is the value of an organization’s knowledge, skills, training, processes and/or proprietary information that contribute to its profitability. It often gives an organization a significant competitive advantage. These intangible assets can be broken down into four main categories: human capital, customer capital, structural capital and social capital.
1. Human Capital
Human capital refers to the knowledge, skills, competences, training, and expertise of an organisation’s workforce. In The Wealth of Knowledge, Thomas A. Stewart’s states, “Because knowledge has become the single most important factor of production, managing intellectual assets has become the simple most important task of business.”
No business can function without the knowledge of its employees. Companies spend considerable time and resources developing expertise and training in hopes of adding to the capacity and capability of their talent. Investment in intellectual capital can provide dividends for years to come.
Any individual – including you as a business owner – can become irreplaceable and very valuable human capital. A potential buyer will want assurance that key employees will continue with the company after a sale. If you have a strong, developed team, someone will place a higher value on your business. On the other hand, if a business is dependent on the owner to be successful, it can result in a lower sale price. This is because there is potential the business will decrease in profitability when the owner exits.
Developing human capital should be your number one priority. There is a direct relationship between intellectual capital and business success. When you focus on the first, the second naturally follows.
2. Customer Capital
Customer capital is a measure of the strength and loyalty of relationships within and without the organization. Relationships may include customers, investors, employees, partners, regulators, communities, and stakeholders.
How strong are these relationships? Are they deep, long-term and contractual? Do they deliver in a consistent, reliable and recurring fashion? Is your product or service integral to these relationships? Can these relationships be transferred?
Everything begins with relationships and getting a clear picture of what is important to each one. The more you interact with key clients, suppliers, regulators, employees the stronger the relationships become. The goal is to become so entangled with each other that they cannot be successful without you.
3. Structural Capital
Structural capital is the underlying skeleton of your company. This includes the organization, information systems, processes, databases, intellectual property, and trade secrets. It is anything and everything that is left after employees go home at night.
A company with established processes and systems can more easily survive the loss of several employees – even good ones. Structural capital takes what is inside your brain and those of your team and turns it into a transferable and usable form. These are your best practices that can be purchased and re-purposed. What enables your team to do the things that makes them special, allows them to meet and exceed customer expectations, and enables them to build and sustain lasting relationships?
The knowledge of you and your team should be documented in such a way that someone else can learn from and apply it. Making this knowledge company property ensures when your talent walks out the door at night, the knowledge they have doesn’t leave with them.
4. Social Capital
Finally, and most importantly in today’s tech world, is social capital. Social media represents your culture, your brand, the dynamic of your team, the flow of operations and communications, and your interactions with customers. The bridge between diverse people and bonds between similar people create a shared sense of identity that is very valuable. Strong social capital creates high levels of trust and enables individuals and groups to work together more effectively.
Research suggests that the wealth and value of organizations are increasingly based on intellectual capital. It can have a direct impact on the financial performance of a company. When a firm with a well built intellectual capital sales, the buyer will likely pay a higher price for the business. In Effective Leadership, Brian Tracy states: “Intellectual capital is the most valuable of all factors of production.”
We at Peak Business Valuation can help you know the value of your intellectual capital and give insights into how you can build it. We would love to answer any questions you have. Please reach out via email or through a phone call.Schedule Your Free Consultation Today!