An intangible asset is something that isn’t physical. In other words, you can’t reach out and touch an intangible asset.
Examples of tangible assets are buildings, land, vehicles, equipment, business inventory, stocks and bonds, and so on. Whereas, examples of intangible assets include a company’s goodwill, its trademark, copyright, etc. An intangible asset can be described as either definite or indefinite (more about this later).
Does that mean intangible assets don’t have value?
No, the opposite.
They’re valuable because they often represent potential revenue for a company. For example, a company boasting instant brand recognition is priceless. If your company is a household name, like Nike or Pepsi, then your brand value is high because people are more likely to know, trust, and want to buy your products. Make sense?
Valuable Intangible Assets
Intellectual property can be extremely valuable. For example, if a company has legal rights through product patents or a trademark, these have value. The same applies to copyrights.
It’s worth noting that intellectual property has a limited lifespan. Because of this, intellectual property is only valuable for the lifetime specified. Or, for the lifetime of the person, if the product is indeed a person. For example, a famous musician who has set him/herself up as a company. His/her intangible assets are their fame (aka, brand recognition), music, and any merchandise associated with the musician. This is especially true if that musician has invented something that he/she has patented and trademarked. For instance, their name, music, products, etc.
All of these represent revenue streams, for example, every time the musician’s music is performed or played they earn income. This would be classed as an indefinite intangible asset because even after the musician’s death, her/his products and music live on.
How Do You Value an Intangible Asset?
Intangible assets can either be bought or created. If a business creates an intangible asset like a client list or a product patent, the cost of doing this can be offset. Related expenses they might offset include lawyer costs, patent filing, and so on.
If a company creates an intangible asset, this doesn’t appear on the company balance sheet or its value. So, for example, if you sell your company at a price higher than its book value, your intangible assets probably have a lot to do with that. As whoever buys your company is paying more for the intangible assets and the premium and prestige they bring to the table.