Intangible Assets: Everything Investors Should Know

Intangible assets are some of the most valuable assets a company or individual can own. These can include trade secrets or intellectual property that can give companies a competitive advantage and long-term success. Unlike tangible assets, such as buildings, machinery or inventory, which can be physically touched or seen, intangible assets represent rights, privileges, trade secrets or other business value without physical form. Read on to learn what are intangible assets and how you can leverage them for long-term wealth and company success.

What Are Intangible Assets?

Intangible assets are non-physical assets that represent a company's intellectual property and other non-monetary assets. These may include trademarks, copyrights, patents, brand recognition, customer lists and software. While they may not appear on the balance sheet, they do affect the bottom line. Examples of intangible assets include the recipe of branded foods like Coca-Cola or Pepsi, the specific fragrance of cosmetics or a product's design specifications. 

How Are Intangible Assets Different From Tangible Assets?

Intangible assets are different from tangible assets in that they lack a physical form. While tangible assets can be seen and touched, intangible assets are typically represented by legal rights or trademarks and are often crucial for a company's long-term success. 

Individuals can also own intangible assets, including design or trade secrets essential for their brand. In addition to specific intangible assets, these can extend to an influencer's charisma, a product’s specific appeal or a company's reputation.  

Benefits of Investing in Intangible Assets

As investors, intangible assets offer additional diversification and long-term value creation to an investment portfolio. Other benefits include:

Competitive Advantage

Intangible assets, such as strong brands, intellectual property rights and customer relationships, can provide a competitive advantage as they differentiate a business from its competitors and can lead to increased market share and customer loyalty.

Owning valuable intangible assets can create barriers to entry for potential competitors. Intellectual property rights, for example, can prevent others from using or replicating certain innovations or products.

Long-Term Value

Unlike physical assets that may depreciate over time through accounting standards, well-managed intangible assets can appreciate in value and continue to generate revenue for an extended period. While some intangible assets require amortization, many continue to increase in value.

Intangible assets, such as patents, trademarks and copyrights, can be monetized through licensing, franchising or selling rights to third parties. This additional revenue stream can enhance a company's financial performance. 

Brand Recognition

Investing in brand-building and marketing efforts can lead to increased brand recognition and trust among consumers. A strong brand can command premium pricing and drive customer loyalty.

Having strong intangible assets, such as a good reputation, positive customer reviews and trusted intellectual property, can enhance a company's credibility in the eyes of customers, investors, and partners.

Companies with valuable intangible assets also tend to have higher valuations in the market. Investors often consider intangible assets, such as goodwill and intellectual property, when assessing a company's worth.

Diversification

Including intangible assets in a company's asset mix can provide risk diversification. While physical assets may be subject to market fluctuations and economic cycles, intangible assets can provide stability and resilience.

How to Invest in Intangible Assets

If you're ready to add intangible assets to your portfolio, here's how to start.

Identify and Assess Intangible Assets

The first step is to identify and assess the intangible assets that can potentially add value to a business. Intangible assets can include intellectual property (patents, trademarks, copyrights), brand reputation, customer relationships, proprietary technology, trade secrets and a skilled workforce. Evaluate the current and potential future value of these assets to the business.

Prioritize Investment Opportunities

Once you've identified various intangible assets, prioritize them based on their potential impact on the business's growth and competitive advantage. Consider factors such as market demand, the level of protection (legal rights for patents and trademarks), the asset's uniqueness and the cost of investment.

Develop a Strategy and Plan

Create a strategic plan for investing in the selected intangible assets. Outline the goals, budget and timeline for each investment. This plan should align with the overall business objectives and growth strategy. Be sure to consider the potential risks and returns associated with each investment.

Protect Intellectual Property

For certain intangible assets, such as patents, trademarks and copyrights, it's important that they are legally protected.

Leverage Intangible Assets

Once you have invested in intangible assets, see how they are leveraged effectively to maximize their value. Brand reputation builds customer loyalty and trust; proprietary technology enhances operational efficiency; and intellectual property generates licensing revenues. Continuously monitor and measure the impact of these assets on the business's performance.

Types of Intangible Assets

Intangible assets can be either identifiable or unidentifiable. Here's how to distinguish between the two. 

Identifiable Intangible Assets

You can define or quantify an identifiable intangible asset such as a patent, copyright, trademark, algorithm, mailing list or domain name. Identifiable intangible assets can be bought or sold and may be separated from a business, although, in many cases, they are essential to the business. For example, a business domain name could be separated or sold but the sale may affect business growth and branding.

Unidentifiable Intangible Assets

Unidentifiable intangible assets are things you cannot specifically define or quantify. An unidentifiable intangible asset can’t be separated from a business. Generally, a business cannot buy or sell an unidentifiable asset without jeopardizing the key business. Unidentifiable assets include brand recognition, corporate reputation and client trust or relationships.

What Are the Possible Risks Associated with Investing in Intangible Assets?

Investing in intangible assets does come with risks. For example, changing market conditions, evolving consumer preferences or advancements in technology can render certain intangible assets less valuable. Likewise, some intangible assets like technological advances or computer software can become obsolete with time. 

Blackberry is a perfect example. As the leading business cell phone in the late 1990s with a proprietary keyboard, it has lost most of its market share and value in the last 20 years. 

Protecting intellectual property, building and maintaining brands and measuring the return on intangible asset investments can be complex tasks. Adequate due diligence is essential before making significant investments and taking positions in intangible assets. 

Increasing a Company's Market Value

Intangible assets offer the potential for unlimited company growth. A capital asset combines identifiable and unidentifiable intangible assets because each type plays a crucial role in increasing a company's market value and overall worth. Effectively leveraging and managing intangible assets can enhance a company's competitive advantage, profitability and growth prospects. Consider also other alternative investments for increasing company growth.

Frequently Asked Questions