Masters of Intangibles

At the winter NAMM show, I sat in awe at the Idea Center while one music superhero after another took the stage.

One common theme across all the best MI retailers was how they all used their intangible assets – 80% people and 20% enabling technology – to help implement their vision and strategy. According to Ocean Tomo, in 1975, intangible assets only contributed 17% of the value to some of the largest companies in America. By 2015, with the explosion of the knowledge economy, the number jumped to 87%.

I spotlighted 10 of the some of the best MI retailers at my talk at the Idea Center. I call this group the Masters of Intangibles because they recognize their intangible assets are worth considerably more than the value of their inventory. It takes significant employee talent to nurture loyal and profitable customer relationships. This talent is a valuable asset to the company, but unfortunately you will not find this asset on your balance sheet. As a non-financial asset, intangibles are hidden from view.

In my January 2018 MMR column, I interviewed Steve Zapf, president of Music & Arts. When I asked Zapf what were the key drivers for valuation multiples, the seller’s intangibles were on the top of his mind: “Larger businesses with consistent earnings that are less dependent on a single person provide for a more stable and predictable operation after the acquisition. These are factors that give us the necessary confidence to increase the multiple we pay.”

In other words, regardless of how profitable a company is, if all the knowledge is locked up in the owner’s head, the business is not as valuable.

Since your intangible assets are hidden from your financial statements, you’re not seeing it. And like the hidden roots, which are responsible for nurturing the life of a tree, hidden intangible assets nurture the life of the company. If you can’t see it you can’t measure it. If you can’t measure it, you can’t grow it. Your most valuable assets are hidden, and as a result, growth is not being managed.

It’s not that intangible assets are difficult to measure; they just use a different metric. Because it is a non-financial asset, the organization will use surveys, peer-to peer interviews, and guided conversations. For example, ever think of asking your wholesaler, “How am I doing?” for some honest feedback?

These are essentially four intangibles that contribute more value to your company than any other asset you own. They are:

• Wellness Capital: Personal goals and aspirations. If you are not taking care of your physical, spiritual, and financial health, everything else will eventually fall apart.

• Human Capital: Employee Talent. In today’s knowledge economy, identifying, training, motivating, and retaining talent has never been more important.

• Customer Capital: Relationships. Customer capital is the single most important influence on revenue per employee and profit per employee according to Bontis of McMaster University. Vendor and other influencers also play a key role in relationship assets.

• Structural Capital: Process and data. The sum total of all your intellectual capital such as databases, process, intellectual property, all belong to the domain of structural capital.

It’s also important to remember that intangibles by themselves have no value. Intangibles have value when they are executing your vision and strategy. Here are three retailers who successfully harness the power of their intangibles to implement their vision and strategy.

1. Sweetwater – Vision: Always do the right thing. An important intangible for Sweetwater is their CRM: Customer Relationship Management system. Most retailers use an inventory management system. Most retailers are not using a CRM. “A CRM is critical in every business I own. We track everything we can about the customer. I would not have a business without a CRM,” says Chuck Surack, founder and president.

2. West Music – Vision: Play now. Play for Life. Pearl West, the retailer’s founder, battled Alzheimer’s the last few years of his life. Music Therapy was instrumental to Pearl’s wellness as the disease took its hold. West Music created West Music Therapy to deliver music’s blessing to all their customers, and delivers services through its growing team of licensed music therapists. Robin Walenta is president and Ryan West, a third generation of the management team, directs the company.

3. Spicer’s Music – Vision: Not your average music store. Driven to create memorable customer events which sets Spicer’s Music apart from the crowd, founder Tim Spicer is looking to set a new world’s record. Spicer’s Music’s goal is to hold the record for the world’s largest rock band, and Spicer’s Music’s last event had 850 members in the band. China, who currently holds the Guinness book of records for the largest rock band has 953 members. I’m betting on Tim Spicer and team to be #1.

Music retail superheroes come in many sizes and shapes. Every company has all of the four intangibles, but some emphasize one more than the other to get the required lift-off. Take an inventory of your intangibles to determine if you have the right mix to fly.

Jaimie Blackman – a former music educator & retailer – is a certified wealth strategist & creator of MoneyCapsules Value-Builder, which capsule value-building activities into 90-day sprints. Blackman helps music retailers accelerate business value now and maximize value when it’s time to exit. Blackman is a frequent speaker at NAMM’s Idea Center. Visit jaimieblackman.com to register for educational webinars and to subscribe to his podcasts.