THE RISE OF INTANGIBLES AND THE CRUCIAL ROLE OF EXPERIENCE IN VALUING THEM

The Rise of Intangibles

Compelling Timeline: Traces the dramatic rise of intangible assets from 17% of business value in 1975 to a staggering 90% by 2020, highlighting key studies and reports like:

• Intellectual Asset Valuation Study (2001): Estimated intangible assets at 70% of US non-financial corporations.
• Corrado et al. study (2005): Attributed 80% of US non-financial corporation market value to intangible capital.
• Sveiby's "The Intangible Economy" (2009): Emphasized intangibles as the primary value driver for S&P 500 companies.
• Ocean Tomo studies (2018, 2020): Estimated intangible assets at 78% and 90% of publicly traded companies' value, respectively.

Significance: This timeline emphasizes the transformative role of intangibles in the modern economy, where knowledge, innovation, and brand value are key drivers of success.

Experience Matters for Intangible Valuation

Challenge the Assumption: Accountants may not be equipped to handle intangible valuation due to:

• Lack of Real-World "Skin in the Game" Experience: Research shows that paper trading differs significantly from real-world trading with actual consequences. Studies like Barber and Odean (1998), Grinblatt and Kaplan (2004), and Feng and Seppi (2011) demonstrate that real-world experience leads to better performance and decision-making.
• Psychological Differences: Research like Auerbach (2002), Leathers and Plott (2001), and Thaler and Shefrin (1981) highlights how emotional factors like regret aversion and optimism bias differ between simulated and real-world scenarios, impacting valuation accuracy.

Analogy for the Need for Experience: Just like an art restorer, surgeon, pilot, or chef, accurate valuation of intangible assets requires the nuanced judgment and intuition developed through years of real-world business ownership and operation (ideally 10-20 years).

Eric Jordan's Methodology: While his "25 Factors" framework provides valuable insights, effectively utilizing it requires the practical, hands-on experience of a seasoned business owner.

Examples: Briefly showcase diverse professions (e.g., architect, project manager, event planner) where experience translates to valuable skills crucial for accurate intangible valuation.

The dominance of intangible assets in modern business valuation demands a shift in approach. Accountants, while valuable for financial analysis, may lack the real-world experience and nuanced understanding necessary to accurately assess the true value of these intangible drivers. This document emphasizes the crucial role of experienced business owners in intangible valuation, drawing parallels to various professions where practical experience significantly impacts performance and decision-making. By recognizing the importance of business owner experience, we can ensure more accurate and reliable valuations in the era of intangible-driven business success.