Due to its heavy reliance on assumptions, fair value reporting has often been dismissed as an art, not a science. Thanks to expanded regulatory requirements, improved technical training and certifications for practitioners and increasingly sophisticated methodology, today’s fair value reporting is more reliable and sound than ever. What does this all mean for business owners and their management teams? Increased scrutiny and standards will only serve to improve the quality of the information provided by fair value reporting.
Fair value reporting as long-term investment
Business owners and financial executives who are required to obtain a valuation for financial reporting purposes (fair value) should not dread this additional cost, but instead consider the information provided a useful management tool that provides insight on what drives the value of their companies. Intangible assets are often the primary contributors to a company’s earning power, allowing it to create value through revenue growth, innovation and profitability, so they should also inform business strategy and decision-making.
Retaining a loyal customer base is critical to a company’s profitability. Long-standing business axioms related to customer satisfaction and retention are now backed up with data. Market research firm Forrester puts the cost of acquiring new customers five times higher than the cost to keep current ones.
Business owners who understand the relationship between customer loyalty and fair value can leverage that information into strategies to reduce attrition, drive repeat business and increase future revenue. Companies that measure and manage customer retention are making an investment that will reduce operating costs, generate referral activity and increase long-term profitability.
Whether it is a company logo (McDonald’s golden arches) or a slogan (Nike’s “Just do it”), trademarks are important legal and social defenders of a brand identity. As a company’s brand reputation strengthens, so does the value of the trademarks that protect its design and text elements. The goodwill created by trademarked brand identifiers can be an asset in the war for talent. It can also influence buying decisions and increase the loyalty of the customer base. Respected and easily identifiable trademarks can help companies expand more easily into new products or services, and enhance marketability in the event of a sale of the business.
Workforce in place
Many businesses boast that “our people are our best asset” for marketing and recruiting purposes, but what if it could be proven true? Valuations of the workforce in place often reveal it as one of a company’s most valuable assets. Regardless of the size of the business, the expense related to recruiting, hiring and training a replacement workforce could be significant. Having a well-trained, highly skilled employee complement in place not only drives the inherent value of a company; it is also attractive to potential buyers who would be spared the considerable expense of investing in an entirely new team.
Viewing employees collectively as an asset that drives value instead of simply another operating expense may be a change in perspective, but this mind shift could inform decisions and policies related to workforce development, training and learning opportunities, recruitment efforts, employee engagement and even compensation.
Beyond the compliance reasons, the fair value process can help business owners and their management teams gain a more comprehensive understanding of how intangible assets drive their company’s value. In a competitive economic landscape, this useful business intelligence can be deployed strategically by decision makers to support growth, expansion and competitiveness in the marketplace.
Contributed by Gretchen G. Naso, CVA, MBA, Principal in RKL’s Business Consulting Services Group. As a Certified Valuation Analyst, Gretchen specializes in valuations required for GAAP-based financial statement reporting including purchase price allocation and employee stock options issued as compensation. Gretchen’s valuation work often focuses on the intangible assets of a company, such as trademarks, customer relationships and intellectual property.
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