Valuing Your Company: Intangible Assets

Summary

In this discussion, Bruce from American Capital Advisors emphasizes the importance of valuing a company's intangibles beyond just financial metrics. He highlights the significance of factors like management team, market position, and product differentiation in determining a company's future growth and sustainability. The firm's deep dive into businesses, leveraging domain expertise and a quantitative model, allows for a more accurate valuation. Bruce illustrates this with an example comparing a profitable company in a declining market to a breakeven one in a rapidly growing market, suggesting investors often favor the latter due to its potential. The key takeaway is the importance of understanding and communicating the intangibles that drive business value.

Takeaways

• 🔍 Valuing a company involves looking beyond financials to understand the intangibles that contribute to its identity and future.
• 📈 The intangibles, such as management team, market position, and product differentiators, are critical for assessing a company's sustainability and growth potential.
• 💡 American Capital Advisors emphasizes the importance of intangibles over financials when evaluating a company's true worth.
• 🤝 Their approach involves getting to know the business deeply to understand the inherent business drivers and industry-specific nuances.
• 📊 In the software industry, they've developed a quantitative model that benchmarks a company against industry peers based on qualitative aspects.
• 💼 The firm leverages its domain expertise and deal-making experience to provide a comprehensive valuation that considers market conditions and growth prospects.
• 🌐 Market growth is a significant factor in valuation, as a company in a rapidly growing market with consistent growth is often more valuable than a stable one in a declining market.
• 📈 EBIT multiples can vary significantly based on the growth potential and market conditions of the company, not just its current profitability.
• 🤔 Investors are more interested in a company's future performance and growth prospects rather than just its past financial performance.
• 🛠 Mirus helps businesses identify the most impactful intangibles, using a combination of quantitative measures and qualitative insights to drive business forward.
• 💬 Effective communication of these intangibles to the market is key to maximizing a company's valuation and attracting investment.

Q & A

What does Bruce Bosom focus on when valuing a company?

Bruce Bosom focuses on the intangibles of a company, which includes aspects beyond just financials such as the management team, market, product differentiators, and other qualitative factors that contribute to the company's value.

Why are intangibles important when evaluating a company's value?

Intangibles are important because they are more indicative of a company's future, its sustainability, growth potential, and overall performance. They help investors understand what the company will do for them tomorrow, not just what it has achieved in the past.

How does American Capital Advisors approach understanding a business?

American Capital Advisors gets to know a business at a deep level, understanding the business drivers and leveraging their domain expertise within various industries to evaluate the company against other companies in the industry.

What is the significance of the quantitative model developed by American Capital Advisors for the software industry?

The quantitative model developed by American Capital Advisors evaluates a company against others in the software industry by benchmarking various intangibles, which helps in understanding the company's position and potential within the market.

What role do deal-making experience and market knowledge play in valuation?

Deal-making experience and market knowledge are crucial as they allow for a more accurate valuation by understanding market trends and applying this knowledge to evaluate a company's potential and position in the market.

What is the difference between EBIT and the intangible factors in company valuation?

EBIT (Earnings Before Interest and Taxes) is a financial metric that provides a basic understanding of a company's profitability. In contrast, intangible factors like management quality, market position, and product differentiation offer a deeper insight into the company's future potential and growth.

Why might a company with breakeven EBIT be valued higher than one with excellent EBIT?

A company with breakeven EBIT might be valued higher if it is in a rapidly growing market and consistently posts 20% growth. This indicates potential for future profitability and growth, which investors find attractive.

How does Mirus help businesses identify impactful intangibles?

Mirus helps by culling through various information, applying years of experience, quantitative measures, and qualitative analysis to figure out which intangibles are most impactful on a business's success and growth.

What is the role of market communication in getting the most value for a business?

Effective market communication is essential for translating the understanding of a company's intangibles and potential into a compelling narrative that can attract investors and command a higher valuation.

How does the script differentiate between a company in a declining market versus a growing market?

The script differentiates by highlighting that a company in a declining market, even with excellent EBIT, may not be as attractive as a company in a growing market with breakeven EBIT due to the latter's potential for future growth.

What does the script suggest about the importance of market growth in company valuation?

The script suggests that market growth is a critical factor in company valuation, as it can significantly influence the multiples and perceived value of a company, even if its current financial performance is breakeven.