Business Plan Balance Sheet: Intangibles
Intangibles are assets that, by definition, are hard to get your arms around. But these intangibles can turn out to be extremely important to your business. Intangible assets include things like an exclusive contract to supply services, a franchise ownership, or a hard-to-get license or permit to do business.
An intangible asset can also be a patent that protects an invention, software technology, or a production process. Intangible assets are clearly valuable to the company that owns them, but the question is, what are they really worth?
Intangibles are usually not reflected as assets, although some companies allocate a symbolic $1 on the balance sheet to indicate that intangible assets are there and are valuable but aren’t measurable. The exception is a purchased patent that may be amortized over the life of the patent.
As a business owner, one key intangible asset that you should be aware of is goodwill. Goodwill represents the positive value of a company’s name, including its customer relations, its workforce, its reputation, and other factors that contribute to the company’s ability to succeed in its marketplace.
When a buyer purchases a company at a price above its fair market value, the buyer is probably paying extra to acquire the company’s goodwill. Goodwill is only realized when a business is sold, and so it’s not carried on a balance sheet unless it was acquired as part of a business purchase.