Intangible Assets

Short of a better plan, a few people I know have lately entered into the business of valuing intangible assets.

I have attempted on more than one occasion to explain to them that this is a silly idea, to no avail.

They tell me that options in the stock market, aka derivatives, are commonly valued, so why not other business-related options?

The conditions that apply for listed stocks are:

1. There is a liquid market for the stock, i.e. usually they can be sold at a price
2. There is loads of stock buying and selling data to model

For business options related to intangible assets I would note that there is:

1. Often there is no liquid market, and often an asset can’t be sold at any price
2. Often there is no readily available data of previous transactions to compare an imagined transaction to

Under these conditions no amount of clever mathematics will make up for the absence of a working model for the future, based entirely on past experiences.

So why do people persist in trying to value what are effectively businesses options for the future?

My guess is that because these options cost money to create, business types often feel pressure to justify that investment in terms of a forecast return on investment.

In my view , the investment into intangible assets, where identified as such, should be via an insurance model so that the investment can be justified in terms of reduced insurance premiums to the business.

This would turn the problem over the actuaries. And let’s see if those buggers can come up with say a model for the value of IP to an individual company. They will struggle of course – and the truth will be out.

In closing, I note that it is very easy, after all, to value a lottery ticket. It is worth far less than the price to any individual punter. The actuaries would figure this out and then not offer reduced premiums based on the investment into intangible assets.

I blame our schools – far too many people leave school and uni and go into business with no gut understanding of statistics. There be the root cause evil.