Dernière modification le 17/11/2022 à 09:23 par Back Office Update - test
INTANGIBLE CAPITAL VALUE
by Erwan COATNOAN DE KERDU
Your copilot in creating a successful company
Intangible capital and company valuation
Intangible capital is directly related to the valuation of the company since it can accelerate it. In short, the company’s wealth exceeds the sum of its accounting assets and is measured according to the quality of intangible assets. When entrepreneurs or business leaders seek funds to grow their business, it is difficult for them to value the business. The many parameters to be taken into account are not just finance and other mathematics. Thus, the accounting value of a company does not sum up its overall value.
Several valuation methods in force
The valuation methods that can be used are diverse. Most are suitable for companies with a history, real turnover and multiple balance sheets. But these are inoperative in terms of the analysis of startups (certainly promising), and therefore have not yet really proven themselves.
The “Thesaurus” method
This method consists of a repository for measuring the financial value of intangible capital and extra-financial value. It was produced at the request of the French Ministry of Finance, Economy and Industry. Its main mission is therefore to create a relationship between the assets of the balance sheet and the generation of cash flow. The repository was built on a solid base that aims to reconcile:
- Measuring the overall heritage value;
- The measure of the value of corporate returns is commonly calculated through the discounted future cash flow
- And the book value of the business.
The Thesaurus-Bercy method provides companies with tools to explore components that do not count. Among them are the company’s customers and employees. It is certain that a long-term clientele as well as motivated, creative and efficient employees bring a lot to the company and therefore represent a certain value. Two measures are then possible with this method:
- Discounted future cash flows – company value
- The future cash flows that will be possible to generate with the current assets – the value of the company.
The workload of the evaluator will differ depending on the approach chosen. In the first case, the discounted sum of future profits will have to be made. The second will require an analysis of the status of all assets and deducing their ability to generate profit.
Discounted Cash Flow (DCF) method
In the field of financial analysis, the valuation of the company is defined as the discounted sum of cash flows that may be generated in the future. The method that allows this calculation is called DCF and is a more complex study than that of EBITDA, but has the same objective.
The financial forecasts of startups are almost never realized. Spreadsheets are too far removed from reality. Therefore, this method should not be used as a method of valuation, but as a promise of profitability if successful.
The “comparable” method
Companies can rely on identical transactions to assess value. In reality, the market sets the amounts. If a startup of the same size and operating in the same sector as another is able to raise two million, then the latter is also able to do so. And to know that it has raised this sum does not give more indications on the percentage of the capital thus sold. However, a startup often has no comparable figures and therefore has no equivalent on the market.
How can the company be valued?
Not all of these methods apply to a first fundraiser. But it is still possible to rely on a capital need and the dilution limit. Normally, arbitration takes the lead. While the business leader will tend to overvalue his company, internal or external advisors will be able to revise this valuation downwards. In reality, it is best to identify the number of customers that can be convinced and then evaluate the turnover they represent.
Choosing the right method
Thus, all the variables that are taken into account are not only financial since the quality of the clientele, the skills of the teams and the subscribers can also constitute a value for companies. It is therefore a question of assessing the value of the company based on the quality of its intangible capital.
The heritage method defines the value of a company mainly on the basis of its assets (machines, real estate, patents, technologies, etc.). Thus, a young company that does not have balance sheets or material assets is by definition beyond such an analysis. The consideration of intangible assets is necessary to enhance the company (team quality, commercial type agreements, etc.). As a reminder, the value of the assets does not correspond to the market value. As a result, the strategy will be decisive in the analysis and valuation of the company. The first step is to decompose intangible capital and establish the various assets involved in the value creation process:
- Human capital: consists of the qualities of the company’s employees (skills, know-how, motivation, involvement in the company);
- Customer capital: builds on the quality of customer relationships and the presence of loyal customers (solvency and profitability).
- Knowledge capital: consists of patents, manufacturing secrets of the company as well as all research and development.
- Brand capital: corresponds to the reputation, uniqueness and notoriety of the company as well as its products and services.
- Supplier capital: is based on relationships with suppliers and distribution networks.
- Organizational capital: includes security, quality policy, distribution network and the company’s control process.
- The information system: ergonomics, costs, business coverage and system reliability are made up.
All of these elements constitute the company’s ability to generate profits. They are therefore not necessarily on the balance sheet, but are undoubtedly part of the profitability of the company, especially in the long term. In order to develop a business and gain value, the entrepreneur must focus on these different points.
Surrounding yourself with quality investors
Fundraising requires a lot of resources from businesses. It is therefore preferable not to use it too regularly. It is in the direction of the market that the entrepreneur must concentrate. This is how the importance of short-, medium- and long-term strategies makes sense. Several steps can be filled by raising funds and turnover and debt make it possible not to dissolve it too quickly. The nature of innovation must therefore be correlated with these few principles. Depending on the positioning of the companies, the speed of access to their target market will be a key factor.
In practice, the dilution threshold for companies is highly variable but is around 20-30%. Once the value of the need is assessed and the post-money value is established, the company has useful data, but in reality, it is a simple basis. Investors are preparing to take risks and will therefore be sure to raise the uncertainties or inconsistencies surrounding the project in question. That is how the negotiation process begins.
Negotiations: clarifying objectives
Companies need to clarify their objectives to investors. Does the leader want to develop it over the long term or give it up? The choice of partners is crucial. The ideal is to have partners capable of providing funds, advice, but also relationships and a certain business potential. The attitude adopted by the business leader or entrepreneur is particularly evocative of his strengths and weaknesses. The time and number of interlocutors available is an asset to be stronger.
When a company is faced with a single interlocutor, it is in a weak position because it has a need. The latter will then have no trouble setting his conditions. Finally, the investor will be more inclined to follow the entrepreneur that he knows how to sell his products and services, as well as if he has a clear vision of his objectives. Being collective in these kinds of negotiations can also pay off. The quality of the team assembled by the manager allows to increase his credibility, but also to multiply his chances of success. The skills and qualities of the employees add value to the company.
A position already established
Having multiple customers ready to buy and a good position in the target market allows you to enjoy a good base. In the same vein, being followed on social networks and seeing the number of subscribers skyrocketing allows to gain credibility and value for the company. Reality makes it easier to extrapolate than a purely theoretical presentation.
Similarly, if an investor or a specialized fund places their trust in the company, the chances of success will increase considerably. Thus, the support of private or public banks, local or regional actors, influential sponsors who trust the manager and his company can greatly impact the decision of investors. The competitions and awards they award also help to build a substantial case around the project. To create strong trusting relationships with investors, there is only one way: to exceed targets and to explode forecasts.
External consultants can help companies prepare and carry out their fundraisers. It is important to keep in mind that in addition to the price of the service, they will be able to expect commissions on fundraising.
In addition, there are crowdfunding platforms that offer companies to raise funds in different communities of investors for them. Some charge a case analysis fee, while others charge commissions on the amount raised if successful.
Valuing a business is a delicate exercise. Between balance sheets, income accounts, annexes, the vision is partial and the valuation incomplete. Indeed, the latter is based above all on the intangible capital of the company. This analysis method provides a more comprehensive study base than other methods as well as more in-depth analytical tools. In order to value a company most precisely, the whole value creation process must be taken into account.
Intangible capital is a reliable analytical basis that can be more than interesting to work with, especially for start-ups and startups.