How does the level of intangible assets and goodwill vary by industry?
Another step in the right direction pertaining to our collective way of thinking involved the federal government’s decision to incorporate certain elements of intangible asset creation into the estimation of gross domestic product (GDP). As of July 31st, 2013, the U.S. Bureau of Economic Analysis (official arbiter of the business cycle) literally rewrote history by restating the size and makeup of the GDP calculation. Most importantly, they will elevate the treatment of “research and development” from a profit-reducing expense (bad) to a value-creating asset (good). With business R&D treated as an “intermediate input” rather than the source of future value that it is, GDP statistics were clearly falling short of capturing economic reality.
More and more businesspeople are recognizing that the U.S. produces a disproportionate share of its wealth from assets such as patents, copyrights, trademarks, designs, cultural creations, and business processes. To see the intangible economy in numbers, Peter Coy of BloombergBusinessweek looked at Apple’s (AAPL) balance sheet and discovered that:
“Property, plant, and equipment, those traditional forms of wealth from the industrial and preindustrial eras, account for $15 billion of its $400 billion market value—just 4 percent of the total. They’re only 7 percent of market value at moviemaker Time Warner (TWX) and drugmaker Pfizer (PFE).
More to the point, this prevalence of intangible asset value is not the sole domain of “big business”. My analysis of historical SBA loans revealed that at least one-half of the Top 30 Lowest Default NAICS codes (based on SBA-published data) were businesses comprised primarily of goodwill or other intangible assets, e.g. professional practices, internet firms, service firms, merchant wholesalers, etc (between 55% and 95% intangible asset value).
Goodwill and/or other intangible assets are present in every business and they should not be “discriminated” against given their direct relationship to profitability and financial and operational performance. It is a feature of our modern “service and information economy” that “hard assets” are less and less important as time progresses.
In fact, even those businesses considered to be “hard asset heavy” will feature goodwill values of at least 40% and often much higher (more profitable, more goodwill – get the idea). Actual statistics related to real world business acquisitions are provided next in order to “document” this fact (provided by BVResources.com):
Goodwill Estimates By SIC Code***
SIC Code/Source Description Goodwill* as Percent of Price
SIC 5983/Pratt’s Fuel Oil Dealers** 80.7%
SIC 5085/Bizcomps Industrial Supply Distribution 47.5%
SIC 7537/Pratt’s Transmission Repair 56.3%
SIC 5912/Bizcomps Restaurants 52.8%
SIC 3499/Bizcomps Metal Fabrication 56.9%
SIC 5712/Pratt’s Retail Furniture Stores 73.4%
SIC 3599/Bizcomps Machine Shops 56.0%
SIC 8021/Pratt’s Dentists 78.2%
SIC 8082/Pratt’s Home Healthcare 95.6%
Range of Goodwill Value from Diverse Industries 48% to 96%
*Goodwill is considered a proxy for all intangible assets, similar to the SBA perspective.
**Pratt’s Stats “asset sale” transactions may include accounts receivable and, rarely, assumed liabilities. Adjustments have been made to reflect their presence to the fullest extent possible. Bizcomps transactions are always reported as pure “asset sales”, but the price and corresponding multiples exclude the impact of inventory (the total price figure has been adjusted to reflect inventory before calculating the goodwill percentage).
***It should be noted that the fixed asset figures utilized by Bizcomps and Pratt’s Stats may be reflective of either book value or fair market value. Due to the tendency to utilize book values for such reporting and based on the fact that FMV is typically greater than BV due to accelerated depreciation methods, the fixed asset values used to generate the corresponding goodwill percentages may be somewhat understated (actual goodwill values may be somewhat lower than stated).