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Valuation & Litigation Advisor - August 2019

 

Social Impacts Are More Than Just Social

Contributor: Daniel Roche, CPA/ABV, ASA, Partner, Advisory Services

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Are you and your business capitalizing on the use and value of Social Media?

How many companies can you think of that are NOT using any form of social media to advertise, inform, or engage with their customers? Probably not many. There is no avoiding it these days. If a business wants to stay relevant and reach the widest audience, it needs to have an engaging, up-to-date social media presence on various platforms. Companies should be asking themselves: “Are we capitalizing on the value of this social media presence?” But, how is value determined?

When preparing a litigation, tax, or financial reporting valuation (i.e., a purchase price allocation), the task of valuing certain identifiable intangible assets, including intellectual property, may be required. A study by Ocean Tomo showed that, as of 2015, intangible assets represented 84% of the market value of the S&P 500.1 With the continual advancement of technology and the internet, the components defined under the umbrella of intellectual property are increasing. Social media has become increasingly essential in day-to-day business operations. Business owners and business valuation experts should take a closer look to determine if the value of a company’s social media is being incorporated into the value of the businesses and, more specifically, its intangible assets.

Social media and social networking are tools used as either substitutes for or complements to other forms of marketing. The list of online social platforms is extensive, but those most notably used in business include Twitter, Facebook, Instagram, Pinterest, YouTube, and LinkedIn. By definition, social media is the content posted to these social sites, such as videos, pictures, links, and blog posts. Social networking is the level of user engagement with that content, measured by metrics such as the number of followers, likes, comments, and reviews the content generates.

In terms of valuation, we can focus on how each social media component adds value to established intangible property such as brand, website, and goodwill, and/or generates revenue directly.

Which aspects of these social platforms are adding value?

The content of a social media platform may have intrinsic value. Individually, contents are digital assets of the company that, in aggregate, connect potential customers and other stakeholders with the business. The content says, “This is who we are and what we have to offer.” It is up to each company and their valuation experts to determine if and how social media content adds value to the brand. For example, is the company’s strategy for when, what, and how often to post a trade secret? If so, this may impart additional value.

Then there is the engagement factor. Do the company’s social media follower add value? How many are customers? If a business has a customer list as an asset, does it include the active social media followers? Does each like, comment, and good review add value? Does positive engagement increase the likelihood of sales? “The Return on a Share” study by ShareThis and Beresford Research says yes.2 They do a deep dive into how positive engagement and in-depth reviews can influence friends, family, and other like-minded individuals.

Content and its associated engagement metrics are displayed together on one social media page or post. If it is not practical to consider each aspect individually, consider if or how the collective unit adds value. In a sale, is there enhanced brand value or goodwill related to pre-existing social accounts that include followers and positive engagements? On the other hand, would the buyer rather start the social accounts all over again from scratch? Each situation is different, and each company must calculate the cost/benefit of continuing the social platforms as they are versus the costs to start again.

In addition to identifying assets, it is important to identify who owns each social account. Is there only one company account, or do employees have accounts that represent the company? Is there a clear or written policy on account ownership? PhoneDog can tell the cautionary tale of what can happen when there is not.3 A former employee left the company, took his Twitter account with 17,000 followers with him, and began using the account for his new employer. PhoneDog sued their former employee for damages. PhoneDog calculated the damages by determining a dollar value for each Twitter follower. However, the valuation method and overall value was challenged by the defendants in the case. Ultimately, the case settled, and it appears that the former employee retained ownership of the Twitter account.4

The highlights of this case that are relevant to all companies using social media include: 1. proof of ownership and 2. a recognized method of valuation. These issues will pop up more often as social media continues to integrate into day-to-day business.

How can social media platforms generate income and cash flow?

Does your company’s social media platform already have high volume traffic and followers? There are new data analytics features being integrated into social media sites on a continuous basis, allowing businesses to target an audience from their existing followers, to sell products directly from their social sites, and to review the data analytics to determine if the targeted content was effective. This eliminates the waste of resources. This method of using data analytics is similar to the advertising model.5

The next level of posting targeted content is paying for advertisements or sponsored posts. It requires a budget but allows the content to reach a wider audience. Especially by followers who are not yet following the business. The same data analytics tools are available to ensure the effectiveness of the ads. Included in the metrics is return on investment – sales correlated to each paid advertisement or sponsored post. Having these metrics on hand in real time allow companies to diversify their strategy and fluidly change for what works and what does not.

Instagram, Pinterest, and Facebook each have the click-to-buy options, which allow customers to see a product while scrolling through their social feeds, click the image, read the reviews, and purchase in minutes all without leaving their current app. Companies that cater to the culture of instant gratification by offering this feature will increase sales from their posted links.

Conclusion

I may be new to the world of business valuation, but I am a seasoned shopper and active user of social media. My intention here was not to give answers, but to ask questions. Social media platforms are only expanding and the technology advancing; they are here to stay. My intention is to get companies thinking of ways to capitalize on their use of social media and to challenge valuation experts to think about how to incorporate the current impact of social media into the valuation of intangible assets.

Connect with Marcum LLP on Twitter, Facebook, Instagram, YouTube, and LinkedIn.

Sources

1. Intangible Asset Market Value Study. Retrieved from https://www.oceantomo.com/intangible-asset-market-value-study/
2. Qu, Y. and Wolfrom, M. (2014). The Return on a Share: Quantifying the Monetary Value of Social Sharing. Retrieved from https://www.paleycenter.org/mc-return-on-sharing-summit-sharethis-April30
3. PhoneDog, LLC v. Noah Kravitz Amended Complaint
4. Case Report: Phonedog v. Kravitz. Received from http://tsi.brooklaw.edu/cases/%5Bfield_case_reference-title-raw%5D/reports/case-report-phonedog-v-kravitz
5. Zyla, M. (2017). Social Media: Who Owns It and What Is It Worth? Retrieved from www.bvrresources.com

 
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