A client of mine decided recently to incorporate his business.
“What’s it worth”, I asked
“Does it matter” he replied “I’m not planning on selling”.
“Yes you are” I told him. “Incorporation of a business or ‘going limited’ as many people call it, is legally and for tax purposes a sale from one party to another, in this case a sale by you to a company which you just happen to own but is still a separate legal entity”.
“Not many people know that”, I said in my best Michael Caine voice.
So, back to what it’s worth.
“What do my accounts say it’s worth?” he asked.
“I’m afraid that’s not what accounts are for” I said. “Businesses are often worth far more than the ‘value’ in their accounts. Think about Facebook and Google whose market value is thousands of times the value of their assets”.
That difference is misleadingly called goodwill by accountants. Without getting too technical, what it really is is the discounted value of future income streams. And these are usually generated by off balance sheet assets such as intellectual property, know-how and data.
I was reminded of this conversation by the news this week that the NHS is seriously underfunded (not really news) and that numerous countries, including the US, would like access to its data. Not surprisingly, its data has a huge value as it’s the only patient database of its type in the world with a longevity of data collection of over 70 years. Literally from birth to death in many cases.
And some people argue we should just give it away!
Now, I do understand the ethical argument for that, but seriously? Wouldn’t monetising that data to fund the NHS be a much better option?
The problem that exists is that most people don’t see the value of the intangible assets in their business that doesn’t show up in their accounts.
Just like my client. When I asked if he’d sell his business for the balance sheet total in his accounts his reply was “No way.” So we worked out what its true value is and ‘sold’ it to his company at that price. (By the way this creates all sorts of advantages, cash and otherwise, for the owner, which are beyond the scope of this article but feel free to get in touch if you’d like to know more.)
So how much are your intangibles – intellectual property, know-how and data – worth? And do you actually own them and are they protected? This is particularly important if you are going to sell your business to a third party……… and is where my friend Liz Ward of Virtuoso Legal can help.
As the information age advances the most valuable assets in your business are probably the ones you can’t even see!