Think about a recent acquisition that you were involved in. Having accessed the business in the post completion period, which of the following assets proved to be more valuable:
- The physical assets: Intellectual property, technology platform, operating infrastructure, plant and equipment, inventory / working capital, cash in the bank.
- The employee assets: innovators, R&D experts, operations managers, leaders, customer facing relationship managers, sales people, ‘historians’ (those who understood the context of the business because they were there at the start), administrative staff, owners of technology / systems
- The reputation assets: Customer / Supplier relationships, brand
You’ll say to me, quite rightly, ‘how can I value these three things alongside each other? One set is completely tangible and any accountant worth his / her salt will give me 10 different ways to value those assets. The second and third? Who knows, perhaps the only way to value that lot is through replacement cost’.
….and there’s the challenge. Many of you will be aware of the infamous quote ascribed to Drucker..”what gets measured gets done.” In the absence of a ‘quick and dirty’ method of valuation, no value gets ascribed beyond the most basic…which is replacement cost. Even the most hardened of accountants would recognize, intangible or not, that’s hardly an accurate estimate of what’s lost when a key employee leaves or a brand is damaged through poor customer service.
I prefer the Einstein version:
“Not everything that counts can be counted, and not everything that can be counted counts.”
Let’s think about it in a different way:
- The valuation of the first set of assets I’ve lumped together is, within reason and in a relatively narrow range, fixed. There are circumstances where, perhaps because of the value of the underlying commodity (for an oil and gas business), the valuation will change but the change is hardly likely to be material.
- The value of the second group is anything but fixed…it can in fact be infinite if you happen to inherit an employee who identifies the disruptive innovation that sets the standard for your business. It can also have significant downsides as the risks from underperformance can be massively destructive to the underlying value of the business.
- For the third group, a mixed bag. Beyond any contractual revenue streams (which are not affected by any change of control clause), the valuation is challenging but through the ‘goodwill’ calculations, entirely possible.
A few questions for you as you contemplate your next deal:
- In your integration effort, how are you going to divide your time between these three asset classes?
- Is your decision influenced by the upside opportunity and the downside risk…or the tangibility of ascribed value?
- What do you need to do to create an understanding of these challenges within your organisation?
- What should be included within the scope of due diligence to identify the key sources of risk as described above?