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What is a business worth? Why does the value of a business change over time, sometimes radically such as was seen with some technology companies in recent years? In a knowledge-driven and dominated economy how should intellectual capital and brand identity be valued?

The measurement of Capital Expenditures (CAPEX) and Operating Expenditures (OPEX) is one of the starting points for grappling with the difficult problem of business valuation. Capital Expenditures consist of all of the tangible and sometimes intangible assets that are used to generate new business and revenues. Operating Expenses consist of those expenses necessary to maintain the capital assets. After subtracting operating expenses from operating revenue the magical figure which everyone is interested in is arrived at: Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA. EBITDA is a good starting point to help with firm valuation but as it has been said, things aren't so simple.

The OPEX/CAPEX distinction becomes much more complicated when it is applied to firms whose products are driven by knowledge workers which happens to be true of most firms these days. It is, in fact, a accounting concept derived from an earlier era where capital-intensive firm dominated the landscape. The persistent gap between what is known as the Enterprise Value of the firm which is derived from EBITDA and the value of a firm assigned by the stock market is a testament to the limitations of the Enterprise Value concept in today's technology-dominated economy.

At present, there is no generally accepted way of measuring the value of Intellectual Capital in the firm. In a technology firm, by way of example, is investment in critical knowledge acquisition by the engineering staff truly an operating expense or is it, at least partially, a capital expense? Traditional accounting theory would always classify such an outlay as an operating expense but the distinction seems less clear when knowledge acquisition becomes an essential pat of the firm's plan to create future cash flows. A company such as Qualcomm consists largely of engineers and lawyers and doesn't have a tangible, physical product.

The CAPEX/OPEX paradigm needs to be updated for the 21st century. A more up to date approach to expense accounting properly would take into account changes to Intellectual Capital Assets. Such a change must wait, however, for a more precise accounting definition of Intellectual Capital.

Learn more about this author, Cary Dowalt.
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