When thinking about selling your business ensure you spend time and effort identifying the intangible components that could contribute up to 90% of the value of the sale
Almost 6 years ago I wrote a post that identified intangible value at 87% of the Standard and Poor’s index. An update to that index done by Ocean Tomo now puts the number at 90%. While this is a small increase only, it is off an extraordinarily high base, and the index is based on 2020 numbers. Given the run of technology stocks over the last couple of years, I hazard a guess that the number is now well over 90%. It is the last 10% that is, as everyone knows, the hardest to capture.
This is a considerably greater percentage than the other major stock market indices. For example the European S&P at 75%, Shanghai Shenzhen index is at 44%, and the Nikkei sits at 32%.
This wide disparity comes from the makeup of the indices.
The US S&P top ten contains nine technology businesses the outlier being Berkshire Hathaway. In order, on Nov 16, 2024, the top ten and their share of the index is:
NVIDIA 7.2%. Apple 6.8%, Microsoft 6.2% Amazon 3.8%, Meta 2.5%, Alphabet 2.1%, Tesla 1.8%, Broadcom 1.7%, Berkshire Hathaway 1.7%.
Even amongst these behemoths, there is a strong skew to the top three. This top ten constitute 35.4% of the total value of the 500 companies in the S&P index. The Pareto Principle at work, again.
The trend is also clear amongst the other major indices. From much lower bases, they are all heading towards the increasing valuation of intangibles in the total value of their stock.
Ignoring this trend and failing to respond is leaving money on the table.
Over the last few years, I have consulted on several projects where small businesses have been sold. In each case, the sale has been made at a considerable premium to the standard industry multiples that would usually be applied. The driver of the premium has been the effort put into identifying and articulating the value of intangibles to the purchaser. I’ve called it finding the ‘Rembrandts in the roof’, a phrase I picked up somewhere after reading of a dusty Rembrandt was discovered and authenticated in the roof of an old house in Amsterdam 30 years ago.
Are you actively looking to identify and quantify your hidden Rembrandts?
