Tag Archives | intangible assets

Intangible Assets: Protecting Your Brand And Reputation

“In an economy where 70% to 80% of market value comes from hard-to-assess intangible assets such as brand equity, intellectual capital, and goodwill, organizations are especially vulnerable to anything that damages their reputations” (Harvard Business Review). Last week, I had a conversation with one of my coaching participants, Dory. Dory’s company is trying to make a lot of changes. Changes that as a financial leader just doesn’t make sense. It involves repositioning the business. It requires new marketing, new branding, new value, new culture, new staff… It’s an entirely new brand! However, the leadership fails to see how making this large of a shift will not only change the brand, but it will also risk destroying the firm’s reputation. In this week’s blog, we are discussing about protecting your brand and reputation.

With 70-80% of value stemming from intangible assets – such as your brand and reputation – it’s important to know what your company’s strengths and weaknesses are. Start enhancing those strengths (and resolving those weaknesses) with our Internal Analysis whitepaper.

Protecting Your Brand And Reputation

In today’s world, protecting your brand and reputation should be a priority because it can be destroyed with one social media post. In a WSJ article, Keri Calagna, principal at Deloitte & Touche LLP and leader of Deloitte Advisory’s brand and reputation management services, says that, “brand and reputation are complex, difficult to measure, hard to predict—often a result of strategic and operational decisions—and influenced by factors outside of an organization’s direct control.” But there are things that you can do as an organization not to further diminish value potential.

Protecting Your Brand And Reputation, Protecting Your Intangible AssetsFor example, we have a client that recently experienced an incident near their facility. The client’s concern was reputation and responsiveness to the situation even though they were a third party to the incident. But the perception with regulators and potential customers is very important. So, our client went above and beyond to respond and assist in the situation. This was seen in a very positive manner with regulators, neighbors, and customers. As a result, they were building very positive brand equity.

Brand Definition

Business Dictionary defines brand as a “unique design, sign, symbol, words, or a combination of these, employed in creating an image that identifies a product and differentiates it from its competitors.” Over time, a brand becomes the face of the company, something that customers recognize, and conveys the value of the product/service. It is your Image.  For example, Coca-Cola is historically seen as the #1 soda producer over Pepsi. Coca-Cola’s branding efforts have created a culture and a value among consumers.

Brand equity can go either way – positively or negatively. For example, influencers, bloggers, neighbors, friends, and family have recommended Product A to you. As a result, you are most likely going to buy Product A and any other product you need from that company. Then, you come across Product B. Product B has been known for its poor quality and is generally not as effective as Product A.  Product A has positive brand equity, whereas Product B has negative brand equity. As a result, Product A has a lot more wiggle room to make mistakes than Product B.

Take inventory of your company. What does your company do well at? What weaknesses does it struggle with? Click here to access our Internal Analysis to take a complete inventory of your company. 

Reputation Definition

Cambridge defines reputation as “the opinion that people in general have about someone or something, or how much respect or admiration someone or something receives, based on past behavior or character.” In other words, the reputation is how customers perceive your company versus how they recognize your company.

Protecting Your Brand And Reputation, Protecting Your Intangible AssetsAlign Strategic Decisions With Brand

One method to protect your brand and reputation is to align it with strategic decisions and overall strategy. For example, a company makes a decision without factoring in its brand. Customers and potential customers do not agree with the decision make because it changes X, Y, and Z. We have seen companies destroy themselves because they do not consider all factors before making changes to their brand.

Know Where Breakdowns Occur

Generally speaking, any breakdowns in your company will have to do with your human capital. If there is a misalignment with the actual company culture (not just what you perceive) and the brand, then your team will not be able to successfully deliver what the brand promises. Educate your employees on the brand. Fix issues within your team before it’s vastly different than the brand you are putting out there.

Protecting Your Intangible Assets

In the end, brand and reputation are intangible assets that your company needs to care about. It impacts value potential and the bottom line. Instead of managing crises, let’s look at how to manage risks and consequently, protect your intangible assets.

How does a company protect its intangible assets? Protecting your intangible assets starts with knowing what they are. What is your company known for? Why do customers choose you over a competitor?

Then start to identify what could change those answers. Is it government regulations that will change your product? What about material changes?

Finally, package what your intangible assets are and what influences them. Manage any risk threatening those assets.

How Your Brand And Reputation Impacts the Bottom Line

Before you go about making any changes to your brand, look internally at what is reliant on that intangible asset. In my first example, Dory’s leadership was not looking at how the employees, customers, vendors, investors, etc. were tied and attached to the brand. If her company made the change they wanted to, the company would lose its employees, customers, vendors, and investors. Sometimes, the brand is the thing that has made you so successful. If you are protecting your brand and reputation from potential changes, then take a look at our free Internal Analysis whitepaper. This will help you get a high level view of what impacts what.

Protecting Your Brand And Reputation, Protecting Your Intangible Assets, Intangible Assets

Protecting Your Brand And Reputation, Protecting Your Intangible Assets, Intangible Assets

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What is GAAP?

What is GAAP?

GAAP stands for Generally Accepted Accounting Principles. It is the set of rules and guidelines for U.S. companies to follow. GAAP regulates financial reporting for public companies, private businesses, non-profits, and government authorities. This means that GAAP outlines the procedures to make sure that businesses are recording their financials in the same way.

GAAP Principles

The principles in GAAP ensure transparency and consistency. This includes the following topics:

The overall philosophy behind these principles is to prevent deceptive recording.

What is IRFS?

While the United States follows the GAAP, most of the developed world follows the International Financial Reporting Standards (IFRS.) In 2008, the United States decided to move towards adopting the IFRS to be more consistent with the rest of the world. While the long term effects are only speculative, the short term changes will have an immediate impact on accountants, managers, and investors.

IFRS vs GAAP

What is the benefit of following the same set of guidelines as the rest of the world? One major advantage of having the same international financial reporting guidelines is the effect on investors. Investors will be able to compare and contrast investments between nations more accurately.

For example, if there is one startup in the United States and one in London, then they will likely use different methods for financial reporting. This could make the investor’s decision very difficult. If inventory and depreciation are valued differently, then the investor might not fully understand the true standing of these startups.

What is GAAP

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Intellectual Property Risk

See Also:
Tips on How to Manage your Lawyer
What should General Counsel’s relationship be with a Board
Corporate Veil Definition
Corporate Veil
Ten In-House Secrets for Reducing Your Company’s Legal Costs
Red Herring

So What Is the Problem With Intellectual Property Risk?

What do a small business software company, a privately held manufacturing company, a big box retailer, and a medical device company all have in common? Intellectual property risk.

Intellectual Property

“Intangible” versus “tangible” assets include intellectual property, which covers a diverse range of legally-protected rights such as patents, copyrights, trademarks, trade secrets, and designs, and other forms of intangibles such as human capital, contract rights and goodwill. In our increasingly knowledge-based economy, intangible assets have economic and strategic importance just like tangible assets such as real estate and product inventory. In fact, there is a silent war between “intangible” assets and “tangible” assets. Many would say that intangible assets are winning.


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Intellectual Property Risk

From the traditional risk management perspective, categorize intellectual property risk as both a first and third party risk.

From the first party intellectual property ownership perspective, the risks include the following:

  • The legal costs of protecting and enforcing intellectual property rights
  • The loss or diminished value of intellectual property as an asset, or diminished licensing or product revenues, as a result of legal findings of invalidity, unenforceability, or non-infringement, or challenges to title or ownership

From the third party intellectual property infringement liability perspective, the risks include:

  • The legal costs to defend against an intellectual property infringement or theft suit;
  • Any resulting settlement or damages costs;
  • Design-around costs; harm to customer relationships; and negative impact on company share price.

Example of Pharmaceutical Companies

To illustrate several of these intellectual property risks, let’s look at the example of a generic pharmaceutical company challenging a name brand pharmaceutical company’s patent-protected drug through a paragraph IV ANDA and a lawsuit against the name brand pharmaceutical company’s patent on that drug.

The risk to the name brand pharma company is that the generic drug company will be successful in invalidating its patent by proving that the US Patent and Trademark Office should not have issued the patent to the name brand drug company in the first place. If this happens, then the name brand pharma company can keep selling its drug. But it can’t prevent the generic drug company from selling a drug based on the same compound at a much lower price. And, the patent asset’s value goes to zero.

The risk to the generic drug company is if it cannot prove that either the name brand drug company’s patent is invalid or that its drug does not infringe on the name brand drug company’s patent. If found to infringe, then the generic drug company must pay damages for any past sales of its infringing product. It must pull its infringing drug off the market or develop another, non-infringing compound on which to base the drug. Oh yes, and both sides will incur several million dollars in litigation costs in this process.

Minimize Intellectual Property Risk

There’s no quick fix, but the disciplined, integrated use of sound risk management practices will minimize intellectual property risk. This requires a coordinated approach by risk management, legal, financial, product development, and marketing to identify the risk, analyze it, and manage it. Who within a company should be responsible for managing intellectual property risk–Legal? Risk management? Product development? Marketing? Finance? Accounting? All of the above.

Is Insurance the Answer?

Insurance is not the only intellectual property risk management strategy. But it can be a key intellectual property risk management tool. The intellectual property insurance market is continuing to mature, despite some stops and starts. The global intellectual property market is on the increase, with some national patent offices creating and supporting intellectual property enforcement programs for their nationals. As underwriting processes and methodologies and policy forms are improved and actuarial data becomes more widely available, intellectual property insurance is expected to grow into a large, mainstream line of coverage, much like what has happened with D&O, E&O and product liability coverage.

Lloyd’s of London

Generally speaking, types of specialty line, stand-alone intellectual property insurance include: infringement liability; enforcement or abatement costs; reps and warranties, and first party loss or impaired value. Lloyd’s of London has been underwriting intellectual property risk for non-North American companies since the early 1980s. Some of its member syndicates are the most experienced global risk insurers.

After a five year hiatus, Lloyd’s of London, along with other London and US capacity, is back to providing intellectual property infringement liability coverage and intellectual property reps and warranties coverage to North American companies. These carriers offer claims made indemnity policies of up to $15+ million in limits for competitively priced premiums. There are also some US domestic alternatives, both stand-alone and as part of other types of coverage such as media, tech E&O, and cyber.

Infringement Liability Policies

Focusing specifically on infringement liability policies, the scope of coverage varies. For example, some markets require that the applicant obtain a freedom to operate opinion from an attorney. Then build the cover around the terms of the opinion. Others undertake their own due diligence and provide full coverage for products, processes or services sold or used by the applicant. More recent policies cover indemnities given to suppliers and licensees. This a very valuable extension for the technology community. Arrange territorial coverage worldwide. Policy terms are typically one year.

Such policies may or may not be duty to defend policies but most will include hammer clauses. Because insurers recognize that intellectual property litigation, particularly patent litigation, requires special training and experience, policy holders are frequently allowed to use their own intellectual property counsel in the event of a claim. However, most intellectual property infringement liability policies have a self-insured retention or deductible that must first be satisfied. In addition, a co-insurance percentage, which insurers may increase if an insured uses its own counsel, does not satisfy the insurer’s criteria or is not on the insurer’s list of approved counsel. The self-insured retention can vary from zero to several million dollars.

Submission and Underwriting Process for Intellectual Property

The submission and underwriting process varies depending on the type of coverage and the carrier. Some carriers use a staged process that provides a non-binding indication of terms to give potential insureds an idea of the limit of indemnity, self-insured retention, and co-insurance that would be offered and the estimated premium. If the potential insured goes forward with applying for coverage, then pay a nonrefundable underwriting risk review fee to the insurer before the insurer will accept the insurance application or perform its risk review. Other carriers require applicants to obtain a legal opinion and the carrier underwrites behind the legal opinion.

How Can Insurance Help?

Use intellectual property insurance for balance sheet protection, contractual liability protection and deal facilitation. For example, a software company with less than $2 million in annual revenue purchased intellectual property infringement liability coverage. But it also covers its larger licensees/customers. The annual premium was only $35,000.

As another example, a company was seeking to close a $60 million sale of a medical device product range to a large medical device company. A term of the agreement was originally drafted so that a $15 million retention (by way of escrow) was to be maintained for intellectual property infringement claims. This was proving to be a deal breaker until the transaction was saved by placing an insurance wrap for the intellectual property reps and warranties in isolation on a multiyear basis.

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Intellectual Property Risk

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Liquidation Valuation

See Also:
Bankruptcy Information
Chapter 11 Bankruptcy
Bankruptcy Chapter 12
Chapter 13 Bankruptcy
Chapter 7 Bankruptcy
Bankruptcy Costs
How to Make Dramatic Changes in Business
Bankruptcy Courts

Liquidation Valuation Definition

Liquidation valuation is the value of a company that is bankrupt or going out of business. It is the value of the company’s assets, according to what they would be worth if they are sold off in order to repay creditors. This is in contrast to going concern value, which assumes the company will continue to operate for the foreseeable future. The difference between going concern value and liquidation value consists of intangible assets and goodwill.

Liquidation Valuation Example

For example, if a well-known apparel company is going out of business, it would have to sell off its assets – sewing machines, fabric, etc. – to pay creditors. The company would probably have to sell off its assets at a discount. In this case, the company would be valued according to its liquidation value. However, if the company is a going concern, it can continue to sell its brand-name clothing at a markup for a profit. It would then be valued according to its going concern value.

 

 

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Liquidation Valuation

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Intangible Assets

See Also:
Current Assets
Financial Assets
Fixed Assets
Goodwill Accounting Term
Research and Development

Intangible Assets Definition

An intangible asset is a right or non-physical resource of a company. They are usually developed as a result of an acquisition that has been made, or years of research and development to develop a process or idea.

Intangible Assets Meaning

Intangible asset valuation can be quite difficult. If an acquisition is made of another company the goodwill is the amount by which a company pays a premium over the fair value of the net assets. Intangible assets can also be developed over time through research and development, or may simply contain rights over a certain asset to keep competition. Intangible asset examples include the following:

  • Patents
  • Copyrights
  • Trademarks
  • Licenses
  • Leases
  • Franchises
  • Exploration permits

Most of these items are anti-competitive in nature. In that the developer maintains a right to be a sole provider of an idea or asset. Such is the case for patents or trademarks. These items protect the product for the developer so that they can retrieve the costs to develop the product or idea, thus giving an incentive to develop and expand on ideas. Intangible assets like a copyright protect a developer for life. Copyrights are usually for books to protect a writers creative work and protect his/her original thoughts.

Intangible assets measurement on the financial statements can be difficult at times because sometimes it is hard to see the future benefit from holding an intangible asset. Other times it is difficult to measure an intangible assets total life. Amortize most intangible assets over a certain amount of time. If there is a specified period like for a patent then it is easy to measure the amount of amortization, but if it is a franchise is maybe difficult to measure.

Valuation of Intangible Assets

When you perform a business valuation, it can be tricky to accurately value intangible assets. When a valuation becomes complex, it is standard practice to consult with a valuation firm. If you need help finding one, then we will get you connected with one of our strategic partners for your valuation needs. Fill out the form below to get connected:

We will receive your information between 9-5 Monday through Friday. You can expect to hear back within 24 hours. We only use your information to contact you for the desired help.

Intangible Assets

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Intangible Assets

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Goodwill Accounting Term

See Also:
Accounting Income vs Economic Income
Depreciation
Cash Flow Statement
Income Statement
Generally Accepted Accounting Principles

Goodwill Accounting Term

The goodwill accounting term is an intangible asset. It represents non-physical assets, such as brand name and reputation, and shows up on the asset side of a company’s balance sheet.

A company often acquires goodwill by purchasing another company. For example, company A is going to purchase company B. Company B has net tangible assets of $8 million. But company A will pay $10 million to acquire company B. Company A is willing to pay a premium because of company B’s good reputation. The residual, $2 million, is goodwill, and it shows up on company A’s balance sheet as an intangible asset. So, in the case of an acquisition, calculate it using the following formula:

Goodwill = Purchase Price – Net Assets

According to a recent accounting regulation, FASB 142, this accounting term is no longer amortized. Instead, its value can be adjusted periodically for impairment.

Goodwill Accounts

Goodwill accounts show up on the assets side of a company’s balance sheet. The account represents intangible assets, such as a company’s brand name or reputation, that have value but are not physical assets.

Goodwill and Business Valuation

Now, let’s look at goodwill and business valuation. When a business valuation is performed, it can be tricky to accurately value intangible assets such as goodwill and its impairment. When a valuation becomes complex, it is standard practice to consult with a valuation firm. Need help finding one? We will get you connected with one of our strategic partners for your valuation needs. To get connected, fill out the following form.

We will receive your information between 9-5 Monday through Friday. You can expect to hear back within 24 hours. We only use your information to contact you for the desired help.

goodwill and business valuation, Goodwill Accounts, Goodwill Accounting Term

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goodwill and business valuation, Goodwill Accounts, Goodwill Accounting Term

 

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Going Concern Value

See Also:
Valuation Methods
Value Drivers: Building Reliable Systems to Sustain Growth
Value Chain
Liquidation Valuation
Asset Market Value versus Asset Book Value

Going Concern Value Definition

The going concern value definition is the value of a company under the assumption that it will continue to operate for the foreseeable future. This is in contrast to liquidation value, which assumes the company is going out of business. The difference between going concern value and liquidation value consists of intangible assets and goodwill.

For example, if a well-known apparel company is a going concern, it can continue to sell its brand-name clothing at a markup for a profit. It would then be valued according to its going concern value. However, if the company is going out of business, it would have to sell off its assets – sewing machines, fabric, etc. – to pay creditors. The company would probably have to sell off its assets at a discount. In this case, the company would be valued according to its liquidation value.

When one company purchases another, the buyer typically pays more than the value of the target company’s assets. The price premium is due to the value of goodwill, or the value of the company as a going concern.

Going Concern Accounting Concept

The going concern accounting concept refers to the assumption that a company will continue to operate for the foreseeable future. This allows the company to include the value of intangible assets and anticipated profitability in its overall worth. Unless there is reason to believe a company is going out of business and ceasing operations, consider a company always to be a going concern.

going concern value, going concern accounting concept, Going Concern Value Definition

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