Intangible Capital Holds the Key to Value in Closely Held Businesses

• Intangible Capital are the elements that define a company’s real earnings capacity and its value.

• The Exit Planning Institute recognizes four intangile capitals in a business: human capital, structural capital, customer capital and social capital.

• Intangible capital is closely tied to the intangible assets of a business, which commonly represents 80 percent of the value of a business.

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We talk a great deal about how the most important assets of your business are those that can’t be seen or touched. I want to discuss something that exIt planners refer to as intangible capital. Intangible capital groups your intangibles into four classes that a business owner can identify, strengthen, and, in the process, grow their companies and make it more valuable.

Understanding Intangible Assets and Their Effect on Value

The most important and valuable assets of almost every business are the intangibles. They’re something that you can’t find on a balance sheet, but something that you need to understand, protect, and cultivate.

And they are critical to the business owner who is seeking to maximize the value of the business and who is planning an exit strategy.

Tangible assets are things like machinery, real estate, inventory, intangible assets, or things like intellectual property, patents, trademarks, copyright, brand recognition, customer relationships, goodwill, unique processes, and other kinds of proprietary technology.

The Relationship Between Intangible Assets and the 4Cs of Intangible Capital

Understanding intangible capital means looking at the intangible assets along with other aspects and factors of the business, none of which you can touch directly, but all of which represent the business’s value.

They are the result of a company’s innovation brand, building its customer relationships, its documentation, and its structures. And they really represent the long term sustainability of the business. four intangible capitals that the closely held business owners should focus on, and this is according to the Exit Planning Institute, are its human capital, its structural capital, its customer capital and its social capital.

Human Capital

Human capital involves the skills, knowledge, and experience of the business owner and the company’s employees. There are strategies for improving human capital, and these include hiring and training key employees, developing that talent, and having a succession plan in place.

By doing so, the business becomes much less reliant on the owner’s personal skills and expertise, and it becomes much more attractive to potential buyers.

The owner of the business needs to think about successors and replacements. The owner needs to hire and train one or more key employees to take on more responsibilities in case the owner is unavailable. The success of the business ultimately relies much less on the personal abilities of the owners than it does on the abilities of its employees. And that is where human capital comes into play.

Structural Capital

Structural capital encompasses the systems, the processes and intellectual property of the business that are properly documented and protected. Improving structural capital requires the business to document its processes, create intellectual property, establish operational efficiencies, and write it all down. By doing this, the business becomes, again, less dependent on the owner’s personal relationships and knowledge, and it becomes much more transferable and valuable.

Well documented processes and intellectual property increase the overall efficiency and effectiveness of the business operations, and once they’re documented, they’re part of the capital of the business.

Customer Capital

Customer capital includes the relationships, the reputation, and the loyalty of the customer base. Strategies for improving customer capital include diversifying the customer base. Building a strong brand, enhancing customer satisfaction. In doing so, the business becomes less reliant on the owner’s personal relationships with customers, and it becomes more sustainable and valuable.

Investments in marketing can attract new customers and increase brand awareness, ultimately leading to greater business growth and greater profitability. All of this can open up new opportunities for expansion and diversification, and most importantly, it becomes part of the goodwill of the business rather than that of the individual owner. When customer capital resides in the business as opposed to the owner, it enhances its value and attracts potential investors.

Social Capital

Social capital refers to the culture, relationships, and networks within the business. Improving social capital involves creating a positive work environment, fostering teamwork, and building industry connections. By doing this, the business becomes more attractive to potential buyers and employees and enhances its long term value. Workplace culture plays a crucial role in determining the success and sustainability of a business.

It will contribute significantly to the overall reputation and competitiveness of the company. It may not be on the balance sheet, but a thriving workplace culture is also a valuable and transferable asset for the business. Improving intangible capital involves reducing the business’s reliance on the owner’s personal skills, relationships, and knowledge. Implementing strategies to enhance the human structural customer and social capital makes the business more transferable, sustainable, and valuable, ultimately attracting better potential buyers and securing a more successful exit for the owner.