The first is the value of your brands, the second is your customer list, the third is the ‘culture’ that exists, a fragile qualitative asset which is a vital part of commercial sustainability.
A balance sheet is a snapshot in time of the financial value of your business. It is based on standard accounting practice which fails to recognise the non financial assets that may be present. Some may include an element of ‘goodwill’ but that is usually just an accounting treatment of the difference paid for a business compared to its tangible asset backing.
The value of a business is the future cash flow that will come from providing goods and services to customers. While that cash flow does come from the tangible assets of the business, in these days of ‘knowledge work’ most of it comes from the three sources noted above, not included on the balance sheet.
A professional services firm has very few tangible assets. A few desks and computers, they probably lease their premises, and their most valuable assets walk out of the office every afternoon.
In the case of a B2C business, your customers are generally different from your consumers, which just serves to increase the relative value of your brand. Consumers make the vital choice of which product to purchase, the intermediaries, wholesalers and retailers are just anticipating what choices they might make, and profiting from the arbitrage.
An acquaintance sold his business some months ago for a tidy sum. The business had been established for a considerable time, was successful, and he had kept up the level of investment, particularly in his employees, so that it had every prospect of continuing to be successful.
The new owner closed it down.
They took on a few key employees, but locked the gates, broke the operating leases, and sold off the remaining assets.
All they wanted were the customer lists, along with what was in the heads of those few employees who had the direct relationships with the key customers, and the potential scale that was on offer with the elimination of a competitor. The whole value of the business was tied up in the Intellectual Capital of those in the business, and the manner in which it delivered value to customers, not in the hard assets recorded in the balance sheet. However, in failing to recognise the value of the culture in the business which they destroyed, they ensured that the transaction would be a financial failure over the medium term.
Be sure you understand the full value of those assets not on your balance sheet, and invest in them, as ultimately, they will be the core of the value of the business.
