People often say, “Blue sky has no value; it’s a made up number.” Are you sure about that? In this article, we will explore the components that make up blue sky.
Blue sky is also known as goodwill or intangible assets. It isn’t cash, inventory, or equipment. Rather it is intangible—we can’t touch it but we know it has value. Intangible assets are what entice an investor to purchase an existing, going concern business versus starting his/her own business from scratch. The components listed and discussed below are some intangible assets:
Assembled Workforce: A business that has skilled workers in place has significantly more value than a start-up company that has no skilled workers. Imagine starting an accounting firm with no CPAs. Finding educated, licensed and experienced accountants is no easy feat. As such, we know that having a workforce of skilled workers, for example CPAs, translates to greater value.
Non-Compete Agreements: A company that relies on skilled employees who have formed relationships with its clients is so much more valuable when it has signed non-compete agreements with these employees. While not a bulletproof tactic, securing these agreements drastically reduces the likelihood that workers will leave your company and go start their own… possibly taking your clients with them!
Signed Contracts: Having transferrable signed contracts in place with key customers increases the value of a company. For example, an investment professional would much rather purchase an existing business that has signed contracts in place that can be transferred to him/her rather than putting out a shingle and working to secure new contracts.
Location: We have all heard the phrase, “Location, Location, Location!” It’s true; securing a long-term lease or owning real estate in a prime location to attract customers or complement manufacturing processes definitely adds value to a company. For example, Babybel Brand Cheese constructed a plant in close proximity to the dairy farms located near Brookings, South Dakota. This allowed for lower transportation costs and a fresher product to begin the process of making the cheese.
Equipment/Processes: Owning specialty pieces of equipment or intellectual property or having sound processes that are not easily duplicated, drive up the value of a business. An investor would much rather pay a premium for a business that doesn’t require recreating the wheel.
Reputation: Of course, having a stellar reputation that provides free word-of-mouth advertising cannot be easily duplicated. It takes years of providing customers with excellent customer service and end-product to earn the trust and respect of customers for them to send their friends and family to you. However, if the reputation rests within the owner and not the company, it can be very difficult to transfer the reputation to a new owner. Having a well-rounded staff to share in the reputation and trust of customers further increases the value of a company.
These examples are components of intangible assets. We can’t touch them, but it’s undeniable that they generate value.
Make sure to check out my next article in how to answer the question, “What is the value of the goodwill in my company?”
Do you or your clients have Business Valuation questions or needs? Please contact me!
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