Selling Your Business: What Are Tangible and Intangible Assets? - dummies

Selling Your Business: What Are Tangible and Intangible Assets?

By Barbara Findlay Schenck, John Davies

Part of Selling Your Business For Dummies Cheat Sheet

Getting ready to sell your business? You’ll need to separate your tangible and intangible assets because at sale time (or in the sale contract), the Internal Revenue Service requires you to break down the price into asset categories, which are taxed at varying rates.

To value your business assets, you create an inventory of all the assets of your business and assign a value to each based on what it would cost to create or replace that asset in similar condition.

Tangible assets

Tangible assets include business furnishings, fixtures, equipment, leasehold improvements, inventory, real estate, automobiles, and other major physical assets.

Tangible assets are probably the easiest part of your business to value, because by their very definition, tangible assets are ones you can see and touch. You can often even find comparable items on the market (through eBay and other online shopping sites, through equipment distributors, and through other used-equipment outlets) to help you determine current market values. When valuing your tangible assets, also talk with your accountant, who can help you figure the depreciated value of items you’ve held for multiple years.

Intangible assets

In businesses with well-known names, products, and reputations, up to half the business sale price often covers the purchase of intangible assets — things buyers can’t hold in their hands.

Intangible assets fall into two general categories:

  • Intellectual property rights assets, including trademarks, patents, licensing agreements, and trade secrets.

  • Other intangible assets, including business name and reputation, processes, strategies, and general know-how, which together contribute to business value over and above the value of tangible assets. These intangible assets compose what’s called the goodwill of your business.

    Goodwill assets include

    • Your business name and brand identity

    • A trained workforce

    • Loyal clientele

    • Strong and durable supplier and distribution networks

    • Phone numbers and websites

    • Proprietary technology, systems, and processes

    • Brand equity, which is the value of the competitive advantage of your name and reputation in the minds of consumers and business and industry partners.