Tangible Assets: Still the Foundation for SMB’s

Intangible assets are having a moment.

Most accounting standards (such as GAAP, or Generally Accepted Accounting Principles) were created at a time when land, buildings, equipment, and inventory were the core investments of large manufacturing corporations.

The relevance of these standards is being called into question at a time when many of the fastest-growing and most valuable companies are investing heavily in AI, social media brand recognition, and proprietary algorithms. For large (or trying to get large) corporations in particular, a traditional balance sheet focused on buildings and machines – which treats the development of intangible assets as operating expense, not as capital investment – doesn’t give an honest picture of a business’ financial foundation.

The issue is earning much attention in the financial industry and media. The IVSC (International Valuation Standards Council) recently published a response to a GAAP initiative on the matter which included the line, “The possible loss of relevance of financial statements is a serious issue.” Many financial media think-pieces followed.

But for many small and mid-size businesses (SMB’s), proper recognition and valuation of traditional tangible assets is still the best representation of the potential range of business value.

To put it another way: there are many types of businesses for which the physical capacity to produce a certain good or service is going to remain both the foundation of, and the limiting factor for, overall revenue potential.

Some examples include:

-        Tier 2-3 parts and materials manufacturers

-        Contract processers, packagers, and printers

-        Commercial construction contractors

-        Industrial maintenance and service companies

-        Waste and recycling collectors and processors

These types of SMB’s often function as outsourced service/supply chains for larger corporate entities, but they are not usually the ones branding a final good or service to the public. They may use AI platforms or proprietary software which were developed by their corporate client – and many develop their own – but they typically are not investing as heavily in intangible assets as the corporations they are serving.

Our typically SMB clients are operating in the world of physical capacity and efficiency. For them, intangible investments serve to maximize their business value - but are rarely the foundation for it. At Capitale Analytics, our M&E appraisers strive to accurately mark the value of traditional tangible assets while also recognizing situations where a modern intangible-focused approach is required.