As investors, we’ve become conditioned to crunching raw data and examining financial trends when evaluating potential investments. Sometimes this approach doesn’t work. There are times when you need to take intangibles into account.
Three beneath-the-surface factors to consider
Tangible assets seem to garner most of the attention from investors, but these surface-level factors aren’t what drive value in the average organization.
“Intangible assets – a skilled workforce, patents and know-how, software, strong customer relationships, brands, unique organizational designs and processes and the like –Â generate most of corporate growth and shareholder value,” explains Baruch Lev in the Harvard Business Review. “Yet extensive research indicates that investors systematically misprice the shares of intangibles-intensive enterprises.”
Do you know what you’re looking for when it comes to evaluating the intangibles of a business? Here are a few places to begin.
1. Employee development
How well are employees developed? Are most of the company’s leaders hired from other firms, or do they tend to be promoted from within? This tells you something about the level of employee development in the organization.
If most company leaders are being hired externally and there’s a sizable amount of turnover in the lower tiers of the corporate ladder, this is an indication that the company doesn’t know how to maximize talent. If the contrary is true – low turnover and significant upward mobility – then this lets you know that things are healthy.
2. Software investments
It’s nearly impossible for modern companies to thrive without the right software and IT infrastructure in place. Specifically, the type of software in which an organization invests can tell you a lot about its future goals and orientation.
Take ERP software, for example. “When choosing an enterprise resource planning (ERP) solution, being meticulous is the only way to go. Making the right choice for your ERP system will improve your business’s operations, automate most data-driven processes and integrate your entire infrastructure,” SelectHub explains, “while a failed ERP implementation can be very damaging to your business.”
If you aren’t analyzing the investment a company is making in ERP, then how do you know if the organization is on the fast track to success or wallowing down a path doomed for failure? The short answer is that you don’t.
ERP is just an example. You should be evaluating every major piece of software, including CRM, accounting, backup and recovery, marketing automation, payroll and more.
3. CEO track record
While a company’s success isn’t totally reliant on the CEO and executive leadership team, it is heavily influenced by the CEO’s talents and abilities. Thus, when investing in a company, you should always conduct meticulous research on the CEO and where the CEO's strengths and weaknesses lie.
One thing you should be particularly cognizant of is how well the CEO makes decisions. “The quality and speed with which decisions are made determine the productivity of the organization,” says consultant Joel Trammell. “The CEO is responsible not only for the decisions he makes but also any decisions his management team makes. Building an organization that consistently makes thoughtful choices in a timely manner is one of toughest but most valuable things a CEO can accomplish.”
It’s also smart to evaluate the CEO’s track record for delivering performance. Does he consistently meet and exceed quarterly or annual goals? Or is he always coming up short and making excuses for why things didn’t work out? Delivering performance and aligning results with the organization’s mission and goals is very important.
Are you getting the full picture?
If you want to get the full picture, you can’t just look at tangible assets or intangible assets. You have to look at everything and understand that businesses are like living organisms that evolve over time. If you’re just focusing on visible factors, then you’re missing out on the all-important details lying just beneath the surface.
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