Vercor - PHANTOM OF THE ASSETS

PHANTOM OF THE ASSETS

When a company invests in phantom or intangible assets like a research program or entrance to a new customer segment, it is not customary to record the value of the research as an asset on the balance sheet. As a result, the investment appears as a cost item. Both tangible and intangible investments are inspired by the same motives ... to achieve higher profitability in the long term and to build shareholder wealth. The difference in accounting treatment, however, creates a void in fairly reflecting the value of your assets.

To complicate the issue the "cost" of phantom investments can take forms other than direct payments from cash flow. The cost may take the form, for example, of accepting an assignment that yields little cash revenue but has great publicity value or is likely to enhance your competence. A capital expenditure on R&D generates value, which is clearly owned by the company, so it is reasonable to regard such expenditure as investment. The economic value is uncertain, but the same can be said of any investment.

Cash outlay for knowledge acquisition is not always a phantom "asset." Many people insist training and education costs should be viewed as investments, but to whom or what does the value created by such investment adhere? When individuals pay for their own education, they are investing in their own personal capital. When such education is paid for by the company, the link between payer and asset is broken. The company is paying for an asset it will not own. Individual competence is "owned" by individuals, not companies. Therefore, from the company’s point of view, money spent on educating employees is a cost, not an investment.

Phantom assets generally fall into three categories:

• Assets external to the organization
• Assets internal to the organization (but outside the individual employees)
• Individual assets (internal to the individual employees)

Phantom assets are those that may not be specifically stated on a company’s balance sheet and can often be overlooked as key elements of value in a transaction. The following includes phantom assets that can add significant value to the sale of your company:

• Custom-built factory
• Management
• Loyal customer base
• Supplier list
• Reputation
• Delivery systems
• Location
• Growing industry
• Recession resistant industry
• Low employee turnover
• Trade secrets
• Licenses
• Backlog
• Technologically advanced equipment
• Contracts
• Distributorships
• Know-how
• Training procedures
• Proprietary designs
• Systems and procedures
• Name recognition

The message is clear: do not sell your self short. Incorporate the value of your phantom assets into the value of your business by tracking, systemizing and recording operational information that could be sold to a new owner.

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