Intangible factors often have a significant impact on the valuation of a small business. These factors rarely appear on the firm’s balance sheet, but are critical elements in determining the true value of your company. In this article, I look at some typical intangible factors that can drive real value in your business. Yes, that is code for these factors being value drivers.

When you look to exit your business, highlighting these factors, where present, can result in a higher price and a higher level of interest from buyers.

Intellectual Property (IP)

In discussing intangible value in business, the most common example given is intellectual property. We generally conjure up illustrations such as patents, trademarks, and copyrights. Where present, these can be significant intangible assets. They are undoubtedly a potential source of competitive advantage and potential revenue streams, both of which will contribute to a higher valuation.

Copyright

Patents, trademarks, and copyrights offer your firm legal protection over some of the IP you have generated. Copyright automatically covers any original work as soon as it is fixed in a tangible form (e.g., written down, entered into a word processor, recorded as music or spoken word). You do not need to register your work to obtain copyright protection. As a business owner you should note that the copyright is granted to the creator of the original work. If you do not explicitly state in your employment contracts that any work created by an employee becomes the company’s property, you may find the employee owns, and holds the copyright for, their work. This also applies to contractors and suppliers.

An original work cannot be substantively derived from someone else’s work for copyright to apply. The definition of substantive in this context is poorly defined. If the work is derived from someone else’s, you should acknowledge them in the work. If the work is to be used in public (e.g., on your website), it can be a good idea to get a licence or permission to use their work.

You don’t need to include a copyright notice, but it is good practice to. A typical copyright notice includes the copyright symbol (©), the year of creation, and your name. It is also good practice to keep a record of the work. This can include drafts, creation dates, and any other evidence that establishes your authorship and the date of creation. Such records can be useful in case of copyright disputes.

The purpose of asserting copyright is to protect your work from being used without permission (although some use is permitted). If you believe someone has infringed on your copyright, discuss the issue with your legal advisors, and see how you can enforce your rights under the Copyrights Act 1994.

Trademarks

A trademark is a legally protected symbol, word, phrase, design, or combination of these, that serves to identify and distinguish the source of goods or services. Trademarks are a stricter form of intellectual property than a copyright. A trademark provides exclusive rights to the owner, allowing them to use the mark to brand and market their offerings while preventing others from using a confusingly similar mark. Fundamentally, trademarks exist to prevent consumer confusion.

To be eligible for trademark protection, a mark must be distinctive and capable of identifying the specific source of the goods or services. In New Zealand, trademarks can be registered for distinctive and unique marks, such as brand names, logos and symbols, product packaging, sounds and jingles, colours, slogans and taglines, and even two- and three-dimensional shapes. Marks that are generic (e.g., “apple” for apples) or merely descriptive (e.g., “best” for a product) are generally not eligible for trademark protection.

To obtain this type of legal protection, you need to register the trademark with the appropriate agency in the jurisdictions you will use it in (now, or in the future). In New Zealand, the appropriate agency is the Intellectual Property Office of New Zealand (IPONZ). While you can lodge an application yourself on the IPONZ website, it is typically better to use an experienced Intellectual Property lawyer (‘trademark attorney’) to do this for you.

In New Zealand, trademark registrations protect the mark for ten years, and in most cases can be renewed.

In almost all cases, your trademarks will be used by you. Licensing trademarks is not that common. The value they can add to your firm, however, can be significant.

Patents

A patent is a form of intellectual property protection that provides inventors and creators with exclusive rights to their inventions or creations for the term of the patent. In New Zealand, the term of patents is 20 years from the filing date of the patent application. Patent protections cannot be renewed. After the expiry of a patent, the invention moves into the public domain.

Having exclusive rights gives the inventor the ability to make, use, sell, or license their invention however they like. A patent prohibits others from making, using, or selling the patented invention without the inventor’s permission. Patents are generally seen as providing an incentive for innovation by providing inventors with a limited monopoly on their invention. This incentive encourages inventors to invest time, resources, and effort into research and development, knowing that they can benefit from their creations.

A part of the model for the issuance of exclusive rights, patent applicants must publicly disclose detailed information about their invention. This disclosure contributes to the body of knowledge in the relevant field, enabling others to learn from and build upon the patented technology once the patent expires.

The value to a business can be through exploitation or monetisation. Exploitation can result in competitive advantage to the firm. Monetisation of patents involves the licensing of the patent to others, or even the outright sale of the patent.

Most patents are termed utility patents which cover new and useful processes, machines, manufactures, or compositions (recipes) of materials. These patents protect the way an invention is used and how it works.

Less common are design patents and plant patents. Design patents protect the ornamental or aesthetic aspects of an invention, such as its shape, configuration, or surface ornamentation. They are often used to protect the unique appearance of products. Plant patents are granted for new, asexually reproduced plant varieties. These patents are used in the agricultural and horticultural sectors.

The process of obtaining a patent involves filing a patent application with IPONZ. The application is examined to determine whether the invention meets the patentability criteria, including novelty, non-obviousness, and industrial applicability. If approved, a patent is granted. Like trademarks, patent applications are generally handled by specialist legal advisors.

It’s important to note that a patent is only valid in the country where the patent is granted. Therefore, inventors seeking protection in multiple countries often need to file separate patent applications in each jurisdiction. An experienced patent attorney should be able to do these additional registrations.

Other IP

There can be a wide range of other intellectual property that may be found in your businesses, including:

1. Trade Secrets: Trade secrets are valuable, confidential information that provides a business with a competitive advantage. This can include formulas, manufacturing processes, customer lists, pricing strategies, and other proprietary data. These are generally things that could be patented, but you don’t want to disclose the method or recipe as is required in a patent application. If you can in fact keep the secret secret, you can protect the invention for a much longer period than a patent. For example, the Coca-Cola formula is a well-recognised, long-term trade secret.
2. Operating Procedures and Manuals: How you do what you do can be a critical element in valuation and the eventual exit of the firm. Operating procedures – over which you can probably assert copyright – is an important factor for buyers, demonstrating a lower level of reliance on you as the owner. In some aspects of your business, procedures could even rise to the level of a trade secret. The McDonalds Operating System, which describes the processes and procedures for almost all aspects of a franchise store, is a great example of how operating procedures can add to the value of a business.
3. Domain Names: Domain names serve as online addresses for businesses, and can be important IP. Protecting your domain name, variants of that name, brand domains, and generic terms where available across a range of TLDs (the highest-level of domain name, such as ‘.com’ or ‘.nz’) are critical to protect your brands on the internet. In most cases, domains are sold on a first-come, first-served basis, so ensuring you register all necessary domains as they become available is essential for maintaining a strong online presence and brand identity. Keep in mind that domain names are typically used for your web presence and your email addresses. (If you use a free email service like Hotmail or GMail, you don’t actually own the address. It remains the property of the provider. In rare cases, they could take the email address off you.)
4. Phone Numbers: The phone numbers you use in advertising and on cards can represent an important form of IP for your business. In most cases, when you sell the buyer will want these transferred to them. 0800 (and 0508) numbers are quite common, and these numbers in their own right can be valuable. Keep in mind that if you use your personal mobile number in advertising, the buyer may require this as well. A wrinkle with this IP is you don’t actually own the number, your phone company does. They could take it back, although this is rare in the New Zealand market. You may also use mobile numbers with communication apps like WhatsApp and Signal to interact with customers.
5. Online Presence: Beyond your domain names can be a significant body of IP on your websites. This can be made up of proprietary images (photos and illustrations), content (e.g., text), sounds and other recordings, videos, and algorithms on your websites. There may also be proprietary processes tied to these websites and your internal systems, or those of suppliers or customers. In addition, your company and brand social presence can be of great value: your Facebook account name(s) and content posted there. The same applies for other social platforms like LinkedIn, Instagram, X/Twitter, SnapChat, Reddit, and Pinterest. If your business subscribes to third-party directories, you may have content you own there as well. The account names can be valuable in their own right. The content on these sites can similarly be of huge value.
6. Software and Algorithmic Code: Software and algorithms can be protected through a combination of copyright and, in some cases, patent or trade secret protection. This is obviously crucial for software companies and tech businesses that rely on this software to power their business. If you have had proprietary applications developed to run processes in your business, this can represent significant value. This type of value may come from mobile apps, features on your website, desktop and cloud-delivered software that has been written specifically for you. Ensure you own the IP rights (e.g., through copyright), or at least a transferable right to use the code. Also covered here are a range of other software code that often get missed. A non-exhaustive list of examples:
   • Scripts, shell scripts, and ‘batch’ files, including automation scripts.
   • Excel spreadsheet models, macros, and VBA code (VBA – Visual BASIC for Applications – is the Microsoft development language used in many Office applications to develop customisations).
   • Word and Powerpoint templates and VBA automation, or similar.
   • PowerBI and Access database (and similar) applications.
   • Software configuration files.
   • Databases (the data and related code to manage the data; the database software is owned by a third party like Oracle or Microsoft). Finance, manufacturing, HR, Payroll, and CRM are some examples of databases that hold data you (probably) own. Where you own data managed in a third-party application, ensure you can extract all of the data you own. This is particularly important for cloud-based systems like Xero.
7. Third-Party Software: While you don’t own the software running your business, any licences are an IP asset of the firm. You need to be careful to ensure these software systems are transferable – many are not. When you sell your business, the buyer may need to buy their own licences, and even build new servers/instances if you are using non-transferable software.
8. Geographical Indications: Geographical indications protect products originating from a specific geographic location which generally have characteristics, reputation, or qualities attributable to that location. For instance, Champagne, Parmigiano-Reggiano, and Scotch whisky are protected by geographical indications. Your business may have value solely based on its location.
9. Traditional Knowledge and Traditional Cultural Expressions: In some cases, indigenous and traditional communities may have intellectual property rights over their traditional knowledge, folklore, and cultural expressions, to prevent exploitation or misuse. Rights to use this IP can be valuable where it is transferable to a new owner.
10. Content: Something of a catch-all class of IP that can represent value not otherwise discussed. This includes all the Word documents and Excel spreadsheets you have in your business, generated by (or on behalf of) the business. Your contracts and licence agreements. Photos, diagrams, and illustrations used internally or with clients. Sounds, videos, and objects created by or for the business. All of this IP makes up the firm and the firm’s value to you, and to a buyer.

This list represents the diversity of IP that your business may have and use. Collectively, these types of IP make up the somewhat nebulous Organisational Knowledge. In many cases, your company know-how – its knowledge – is tacit rather than explicit, and often only exists in its application by your firm and its employees (and contractors, suppliers, and customers) collectively.

Brand and Reputation

A strong, well-established brand can command a premium valuation. It signifies customer loyalty, trust, and the ability to step out of being a commodity provider and therefore charge premium prices. You can leverage your brand to differentiate your business in its market, setting it apart from its competitors. It can help the business stand out, particularly when it offers unique value propositions or has a distinct identity. Differentiation can attract more customers and even create a competitive advantage. Your customers will specify your brand to meet their needs, as opposed to a generic competitor.

Building your brand profile can also be of significant help when you are trying to attract investment (including debt), build partnerships, approach new suppliers, and market to new marques. If people believe they know you, and believe they can trust you, you get a very strong foot in the door.

Brand strength is also useful when you are looking to sell. Potential buyers have heard of you, and that recognition can result in a premium being paid to acquire you. A strong brand is also likely to drive more interest in the business, with the potential of the price being bid up in the process.

A brand factor we saw during the COVID-19 lockdowns was that strong brands did well online – when the consumer can’t experience the brand before buying. In general, we find firms with strong brands are more resilient in economic downturns. Customers are more likely to continue to support their trusted brands in a tight economy.

An extreme form of brand strength is the ability to sell merchandise that includes your brand. Many firms will produce branded ‘swag.’ In some cases, customers will actually pay for it.

Similarly, a strong, positive reputation among your customer base, with your suppliers, and within your industry as a whole can lead to a higher valuation as it reflects your company’s credibility and trustworthiness in its market.

A reputation for ethics, sustainability, and social responsibility can positively influence valuation. It may also attract investors who align with the company’s values.

Customer Relationships

Your firm’s long-term customer relationships and a loyal customer base is a source of value. If you have a large and loyal customer base you will be considered more stable and less risky than others in your market, and therefore more valuable.

A critical aspect of the value of these customer relationships is that they need to be with the company and brand, not with individuals – which also means the customer loyalty is not due to you.

Customers, Customer Data, and Insights

Access to customer data and insights can be a valuable intangible asset. This data can be leveraged for marketing, product development, and business strategy, enhancing the business’s value.

Customers, customer data, and insights can be valuable intangible assets that can both increase the value of a small business and be a source of competitive advantage. These types of assets contribute to customer loyalty and retention, leading to recurring revenue streams and positive word-of-mouth referrals. A strong brand reputation and trust can be established through satisfied customers and positive online reviews, enhancing the business’s credibility.

Moreover, these assets contribute to the way the business views its customers and market. These build a unique perspective. Customer feedback and behaviour offer valuable information for refining products and services, tailoring marketing efforts, and predicting market trends. Small businesses can leverage this data for innovation, ensuring their offerings remain relevant and competitive.

Customer data can be used strategically to enable smarter, targeted marketing, reducing advertising costs while improving effectiveness. It also contributes to long-term revenue growth by extending the customer lifetime value. Smart customer insights can provide an early warning system for potential issues and support risk mitigation. Properly managed, these intangible assets drive a strong differentiation position.

Market Position

Where you sit competitively in a market can be a source of value. In most cases, however, this value comes from actively developing your market position rather than the firm being pushed into a corner by competitors.

Being a market leader or holding a unique position within a niche market can positively impact valuation. Market leadership often translates to pricing power and growth potential.

Where you sit competitively in a market can be a significant source of value for your business. Note, however, that this value doesn’t typically happen passively; rather, it stems from proactive efforts by the business to select, establish, and then maintain its market position. In many cases, businesses that find themselves in a dominant position have actively pursued strategies to get there, such as investing in research and development, marketing, and customer service. These efforts are not merely reactive responses to competitors but deliberate actions to shape the market in their favour.

Market leadership, for example, can be a powerful driver of value. When a company becomes a recognised leader in its industry, it can gain a level of pricing power that competitors struggle to match. Customers are often willing to pay a premium for products or services from a trusted market leader, which can boost profit margins. Furthermore, market leaders often enjoy greater growth potential as they can expand their offerings, enter new markets, and attract top talent more easily. This growth potential can be a key factor in driving the valuation of the business.

While not every company can be a market leader in an industry, dominating a lucrative niche can be equally advantageous. Niche market leaders often have fewer direct competitors, allowing them to establish themselves as experts in their field. This expertise can translate into higher prices, increased customer loyalty, and long-term sustainability, all of which enhance the business’s value.

An Organised Workforce

Over time, firms assemble a workforce to do the work needed in the company. Through some amount of trial and error, they determine where the edges of the business are most efficient – the line between what employees do and what suppliers (or even customers) do.

The employees build skills and expertise. Collectively, highly skilled and experienced employees, particularly in specialised fields, can be a valuable asset in its own right. Their collective knowledge and expertise may contribute to the company’s success and potential for growth, influencing a higher valuation.

An organised workforce can be a barrier to entry. If someone wanting to move into your market is locked out, they may opt to buy an existing business with an existing workforce. To add to value, however, the workforce must be able to operate without the owner’s involvement and supervision.

Contracts and Agreements

Existing contracts, agreements, and long-term relationships with suppliers, distributors, and major clients can have a significant impact on the valuation of your business. These provide revenue stability and growth potential.

Agreements that provide a level of exclusivity or other form of competitive lockout, can be extremely valuable. Similarly, innovative, unique, and uncommon contractual terms that give you an edge over your competitors or customers adds the business value.

For any of these to impact business value, however, the contracts must be able to be transferred to a new owner.

Recurring Revenue Streams

Predictable and recurring revenue streams, such as subscription-based models, service contracts, or maintenance agreements, are highly attractive to buyers and investors and can lead to a significantly higher valuation that a similar business doing one-off sales.

Predictable and recurring revenue streams, such as subscription-based models, service contracts, or maintenance agreements, are highly attractive to buyers and investors due to the financial stability and revenue reliability they provide. Businesses that can forecast their future cash flows with confidence reduce the level of risk associated with the business investment, making the firm a more attractive prospect. This predictability often justifies a higher valuation.

Recurring revenue strategies foster customer loyalty and retention, in some cases over very long periods. Subscribers or clients engaged in ongoing service relationships are more likely to remain with the business for an extended period, reducing costly customer acquisition efforts. The established customer base contributes significantly to a business’s overall worth, as it represents a reliable foundation for sustained revenue and growth.

As a result, recurring revenue models tend to result in higher customer lifetime values (CLV). Customers who engage in regular payments or continuous service arrangements often generate more revenue over time compared to one-time buyers. This increased CLV is a key factor in a business’s valuation, reflecting the potential for long-term profitability. Buyers will pay a premium for businesses that have successfully maximized CLV through recurring revenue strategies.

Sales Pipeline

A demonstrable and robust sales pipeline can significantly add to the valuation of a business. A healthy sales pipeline demonstrates the continued potential for future revenue and revenue growth. Buyers will therefore pay a premium for a business with a clearly defined and active pipeline of sales opportunities over a similar business that cannot demonstrate a pipeline, even where the two firms’ performance has been similar historically. The future revenue stream provides a level of predictability, thus reducing the perceived risks of the business.

An analysis of the conversion rate of a sales pipeline can help identify ways to improve the level of sales, further adding to the future revenues, and therefore busienss value.

Furthermore, a well-documented sales pipeline demonstrates the transferability of the sales prospects to a new owner, and where in the pipeline new owners need to focus. Using a sales pipeline in this way helps demonstrate to buyers that the current owner can step aside and the business continues.

New Product Pipeline

In a similar way that a Sales Pipeline adds value to a business, so can a New Product Pipeline. Note that a pipeline isn’t a wishlist. It is the front end of a tested and effective process for the development of new products in your business, and will be matched by an historical collection of new products that were developed from the pipeline using that process.

A new product pipeline demonstrates the future focus the business has, and that it recognises the importance of developing new products to the survival and growth of the business.

A new owner can understand the pipeline and see the future value, and the transferability of the products represented by the pipeline.

Competitive Advantages

Any unique competitive advantages, such as access to exclusive resources, favorable locations, or cost-effective processes, can enhance a business’s value. In general, the advantage needs to be transferable to a new owner to have an impact on the valuation of your business.

Many business owners do not know the firm’s differentiators or sources of competitive advantage. In most cases, it can be hard to attribute value to competitive advantage that cannot be seen or articulated. People outside the business might hazard a guess, but this deals more with perception than the reality of the business.

If a business owner cannot recognise and define their competitive advantage, it generally will not contribute to measurable value.

Company Size

The size of a business has a direct impact on the value of that business. Larger firms are generally less risky than smaller firms. Revenue tend to be more stable, management in place, and key processes operating efficiently.

Size also reflects business and management maturity, and therefore transferability.

Growth Potential

The perceived potential for growth, often tied to intangible factors like market opportunity, innovation, and scalability, can substantially affect valuation. Investors may be willing to pay more for businesses with significant growth prospects.

Beyond the firm itself, these effects can be geographically based and industry based. Firm-level effects will relate to many of the other intangible assets discussed here. Across these effects can be multiplicative results, driving even higher growth potential.

Buyers will be looking to understand these growth factors, and the extent to which they will enjoy them, or be able to exploit them, after they own the business. If any of these factors are tied to the owner, the growth impact may factored down.

Excess Capacity

Excess capacity is the surplus production or service capability of the firm beyond the minimum required to meet current customer demand and maintain operational efficiency. This may be represented by idle production lines in a factory, empty office space at a company, or excess data center space for a cloud provider. These are generally un- (or under-) utilised, capital-intensive assets that have required capex spend historically, and likely incur a level of maintenance. This doesn’t include ‘head room’ – spare assets kept available in the event of something breaking down.

Excess capacity in a business can play a significant role in increasing its overall value. Excess capacity represents the ability of the firm to grow quickly, for example to meet unexpected surges in demand or the development of new products that use that capacity. This can lead to a higher valuation for the business.

In a business valuation, excess capacity is specifically recognised. In determining the value of a business, we include all assets of the business that materially contribute to the revenues and profits reported (or projected). If the projections do not include the excess capacity being used in normal operations, the capital cost of the excess capacity is separately calculated using the agreed basis of valuation (e.g., Fair Market Value as of the valuation date), and added to the business value derived.

Company Culture

For many small business owners, the notion of company culture can seem vague and nebulous. It is often hard to separate the culture of the company from the business as a whole, so trying to explicitly describe the firm’s culture is particularly difficult.

The reality, however, is that company culture plays a pivotal role in the value of a business. A strong and positive company culture fosters employee engagement and satisfaction. When employees are happy and motivated, they tend to be more productive, innovative, and committed to the company’s success. This enhanced productivity can lead to improved efficiency, higher-quality products or services, and ultimately, increased profitability, all of which contribute to a higher valuation for the business.

A positive company culture can help attract and retain top talent, with candidates drawn to the firm’s values, ethics, and work environment. This talent enhances the company’s ability to execute its strategic initiatives and remain competitive in the market.

Culture also underpins the relationships with customers and stakeholders. Employees who are aligned with the company’s values are more likely to provide excellent customer service, leading to higher customer satisfaction and loyalty.

As a corollary, a weak or poor culture can detract directly or indirectly from business value.

Some buyers place no value on company culture as they intend to make changes post-acquisition, through integration with another business, or deliberate and planned changes arising from a change in management, processes and procedures, and the way the business is run. In some cases, a strong culture can be a downside to a new owner as this can result in reluctance to change.

A Word (or two) of Caution

As a small business owner, you should recognise and highlight these intangible factors when your business is being valued and when it is being marketed for sale. In the vast majority of cases, intangibles are not separately valued in a business valuation: no specific value is assigned to each. While these assets can be valued, that is rarely the approach in business valuation. These intangible assets – along with most of the tangible assets – are considered a part of the business, necessary for the business to generate its future revenues and earnings.

The breadth and range of intangible factors covered here – almost none of which appear on your balance sheet – represent a substantial portion of your company’s overall value. Conducting a thorough assessment of these intangible assets, cataloging them, and effectively communicating their value to potential buyers or investors is essential for obtaining a fair and accurate valuation. They are also aspects of your business that you need to focus energy on developing and maintaining. Poorly managed intangibles can detract from perceived value, and may deter potential buyers from even making an offer.

Business owners often believe many of these factors in their business are market-leading, unique, and extremely valuable. In most cases, they aren’t. This is the Ugly Baby Syndrome, which we will discuss later. Make sure you get an external, independent opinion of how valuable these factors really are to your business.