An intangible asset, or one that lacks physical substance, is one of the most overlooked and yet critically important areas of business valuation. These assets matter as a means of developing business strategy. Any business as part of a collective organization, such as those involved with a distributor organization, must explicitly address strategy formulation as part of properly leveraging the intangible assets provided to them. This means that gone are the days of limiting intangible asset value.
Some common intangible assets that companies prize focus on include brand recognition, marketability, and intellectual property. Those proficient at leveraging these areas will be able to improve their company’s value through the core intangibles. As a means of valuation, businesses find that harnessing these areas of intangible assets creates a better indication of the company’s performance in the market, furthers tangible assets, and provides a more favorable overall company assessment. But for many, intellectual property reigns supreme as a means of long-term economic worth.
One such area of intellectual property found most notably in marketing is that of customer lists. To those whose property primarily resides in sales success, the customer list is critical. Unfortunately, customer lists are often very overvalued. This is because the value is defined by assumptions and not through a standardized method.
The best practice in valuing a segmented customer list includes two common approaches.
The first is to value the cost-replacement. This is the cost of acquiring a new customer that would be able to replace another on the list. The greater the potential acquisition cost, the more valuable the existing customer on the list.
Next is the buying-potential method, one of the most common valuations types. This requires looking roughly at the customer’s lifetime value and then determining future value based on inflation or deflation of their spending over the past six months to one year. Someone with a high overall spend but limited activity over the past year would be valued lower than a person with a gradually increasing spend up to this point in time.
Each method of valuing a customer list may result in different outcomes. It is important to understand each area of value and what it means to a business’ strategic success. Are you looking to grow or are you looking to soon sell your business? Depending on your answer, the perishability of your list may be a factor. Lists commonly devalue in the marketing industry at approximately 12 months. Maintaining a standard of comparison in your clients over a long period of time will give you an idea of what your rate of perishability might be and therefore, how valuable this intangible asset.