Question: How do investments in intangible assets effect the valuation of a company?

I am the co-owner of a chain of F&B franchises, looking to sell my stake in the business. For past several months my partners and I have been considering long overdue IT upgrades, and an employee training program.

I wonder what effects these investments will have in the valuation of the company, and if these are best done after the change in ownership?

2 Expert Insights

Value isn't always determined by the cashflow you have been able to generate. People buy businesses for what they will do in the future, not what they have done in the past (although it's a good indicator). They will look at intangibles and other factors as part of their formula. For example, if I am buying a business that I think will generate good income for me, but I realize that I need to invest in upgrading the infrastructure, train employees, document policies and procedures, and make other investments, I am going to offer less money.

Many people, when buying a business, want to be able to hit the ground running, so having to do improvements and invest money in new equipment or IT, is a big turn-off...far exceeding the actual cost of the upgrades.

Bottom line, it's like selling a house. New paint, kitchen and bathroom upgrades, fix major problems, and make it look appealing. Same for a business, but with different factors: IT, equipment, employee turnover, processes and procedures, etc., are all going to influence how a buyer looks at the business.

I agree with what Michael said.

What I want to add to it that it is very important that employees are comfortable with the sale as they do not know the new owners and cannot assess how they do things and who they are as people. Keeping the conversation with your employees fully transparent, allowing your employees to ask questions and answer those honestly will make it easier for the transition to be smooth. Most importantly you have to assess the new owners way of being, managing and dealing with people. If this has been important to you then you need to make sure that the new owner will follow suit.

Obviously there are no guarantees but the better your assessment and the better informed are the employees the better chance there is that the transition will be smooth