The stock market tells us that the total value of Microsoft shares outstanding (“market capitalization”) is (or was) about $85 billion. But Microsoft’s financial records say that the total value of Microsoft (“book value”) is (or was) only $7 billion.
What does the market know that the accountants don’t?
The stock market values Microsoft’s intangible assets – its enormous potential to continue domination computer software industry, while accountants struggle with Microsoft’s tangible value and historical costs.
What are the important unreported intangible values in business families?
• Is family ownership and family management a business asset or a business liability?
• Conversely, is family ownership and family management of the business an asset or a liability of the family relationship?
Some businesses are formidable competitors in the market place because of family involvement. They are managed by talented family members whose positive relationship — though quite intangible — constitutes a very valuable business asset. (“Green light” families I call them.) This valuable business asset exists only because the family has discovered and nurtured it. This asset is not reflected on the balance sheet. This asset cannot be acquired or transferred.
Some business families are profitable in spite of family involvement. Wracked by dissention and conflict, their family relationship is a definite business liability. (“Red light” families I call them.) I empathize with their CPAs whose generally accepted accounting principles provide no place to report this liability in the financial statements.
Then there are businesses whose family relationship is part asset and part liability. Some family employees perform brilliantly; others are coasting. There is undue tension between inside and outside shareholders. They settle for substandard business practices and less-than-satisfactory family relationships for the sake of “holding things together”. (“Yellow Light” families.) The assets and liabilities of family management and ownership are offsetting.
Is the business itself an asset or a liability of the family’s relationship? Does the business reinforce the family relationship, or disrupt it? Or is the business both a reinforcement and disruption?
Here’s a graphic way of presenting the question:
• If both are assets, congratulations!
• If one is an asset, the other a liability, you have some work to do.
• If both are liabilities, soul-searching may be in order.