HOW TO EXPLAIN BITCOIN TO YOUR FRIENDS AND FAMILY.

12/7/17

Introduction:

Every new technological development throughout mankind’s recorded history has been met initially with derision, protest, torture, incarceration, and sometimes war. From the Catholic Church’s restraint of Galileo, who insisted that Copernicus was correct in his assertion that the sun was the center of the solar system, rather than the Earth as center, as was the position of the church at the time, to the invention of the printing press, which contributed to  the cause of the French Revolution due to its ability to improve communication exponentially, to the advent of the personal computer, to Bitcoin, and now with the advent of driverless electric vehicles, technology advancement has always intimidated mankind when first introduced. Bitcoin is no exception.

History:

If one reads, listens to, or watches the news, one will hear repeatedly that Bitcoin is a scam, that it will go bust, it will be put out of business by competing bank’s cybercurrencies, or that governments will stop it, etc.  However, I happen to believe Bitcoin will prevail over all obstacles and thus make an attempt to predict the future. In a remark attributed to Mark Twain, “Predictions are hard, especially about the future.”

On August 18, 2008, the domain name "bitcoin.org" was registered.^[27] In November that year, a link to a paper authored by Satoshi Nakamoto titled Bitcoin: A Peer-to-Peer Electronic Cash System^[15] was posted to a cryptography mailing list.^[27] Nakamoto implemented the bitcoin software as open source code and released it in January 2009.^[28][11] The identity of Nakamoto remains unknown.^[10]

In January 2009, the bitcoin network came into existence after Satoshi Nakamoto mined the first ever block on the chain, known as the genesis block, for a reward of 50 bitcoins.

The name Satoshi Nakamoto  is shrouded in mystery. It’s not known if it is a single person, a group of people or just a made up name. Whatever it is, it’s certainly prescient!

Public comments::

The potential, but real, threat of Bitcoin and the blockchain to the established financial order and to powerful financial elites, recently caused Jamie Dimon, CEO of J.P. Morgan, one of the world’s largest banks, to state that  “…Bitcoin…is a  fraud.”

But the man speaks with forked tongue. It’s a known fact that every bank in the world is frantically analyzing the blockchain upon which Bitcoin and over 1500 other cryptocurrencies are based because it will---and is already---changing the fundamental workings of the global financial system.  This new technology threatens the well-being and very existence of every financial powerhouse and its beneficiaries because it brings a truly distributed, democratic process to the functioning of money as a system for the exchange of value. However, only those who believe in Bitcoin will come out whole on the other side. Dimon, instead of being paid millions of dollars in compensation each year, will become the equivalent to the income level of what heretofore were the poorest people in Africa. The few assets he will possess will be his home, assuming it is paid off, and any vehicles and toys, like boats, again assuming they are paid off.

Dimon speaks from his position at the very top of the established financial and political power base.  He speaks not to the point that Bitcoin is a fraud, but rather from outright fear of the ability of this new technology to literally destroy that system he represents. Without a shadow of doubt, he FULLY comprehends Bitcoin’s and the blockchain’s threat to the banking system. Banks will become like horse drawn carriages and buggy whips---a symbol of an antiquated system. Fifty to a hundred years from now, his statement will be seen as akin to those made during the advent of the automobile.

Similarites to exsting money as a store of value and means of exchange:

Bitcoin is fundamentally no different than our current global system of finance. Each country has its own form of currency which serves as a measure of value and means of exchange. Bitcoin, however, does not belong to any country. It belongs to its owners in a fully distributed manner.

All forms of money currently in existence in advanced economies are fiat, meaning they are backed by nothing. Until 1971 the U.S. dollar was backed by gold. As a result, the government could never print more money than the amount of gold stored in its vaults. This gold backing of the dollar also served to limit the amount of dollars that could be printed or coins minted. Thus the value of money could never decrease below the value of gold.  Now the dollar’s backing exists only in the confidence and belief of people that money serves as a store of value and a means of exchange. Once people lose that confidence and belief, they will panic and there will be runs on banks as people seek to withdraw their money from their bank. This is exactly what happened in the U.S. before the Great Depression and also more recently in Cyprus.

In 1971, President Nixon removed gold as the backing behind the dollar. Since then, the price of dollars has been allowed to float freely like any other commodity on trading exchanges throughout the world. Each country’s central bank creates its money out of thin air by entering additional digital numbers in their computer ledgers.  This “money printing” has been proven time and time again throughout history to end in financial disaster. It is happening now, as we speak, in Zimbabwe and Venezuela.

Today, banks operate under what is known as the “fractional reserve system”. The U.S, Government requires that every bank hold in its vaults at least $50 million or $5% of its capital base. A simplified explanation of how the fractional reserve system works is that  people deposit money into their bank and the bank is required to keep only 5% of that money in its vaults available for withdrawal by its owners. The bank is in the business of earning profits, so it turns around and loans 95% of its deposits to others in the form of loans or it may invest in financial instruments, such as government bonds, which pay a percentage of interest.

Vslue:

We must ask ourselves what the word “value” truly and fundamentally means. The fundamental value each individual offers in today’s global society is the ability to work if one is in the working age group. For that value we are paid a wage in the currency of the country in which we reside.

Again, Bitcoin is fundamentally no different. However one key difference is in the type of work that is performed to create value. The work that will be completed by Bitcoin to create value will not be physical or mental. Instead the work that will be performed and is currently performed is digital and virtual.

This digital and virtual work is made possible by a technology named the “blockchain.” The blockchain is a computer algorithm, akin to a mathematical puzzle, but infinitely more complex. The numbers in the algorithm (actually the ones and zeros of the program), stretch to an unimaginable length, nearing infinity. Each time an algorithm puzzle is solved, a new Bitcoin is produced

Furthermore, Bitcoin is limited in quantity to 20,000,000 Bitcoins, the maximum amount that will ever be produced. No central bank will be around to create more Bitcoin and thus inflation. Bitcoin’s value will never be diminished because there are too many of them, the way there are too many dollars which ultimately leads to destructive inflation as in countries like Weimar Germany, Venezuela, and Zimbabwe.

The making or “mining” of Bitcoin is horrendously expensive, requiring vast networks of the most powerful computer servers to work incessantly, creating a Bitcoin approximately every ten minutes. Furthermore the servers create so much heat in their operation that they must be cooled at high expense to a point they can operate at their peak efficiency. This “mining” will continue until the maximum amount of 20,000,000 Bitcoin is reached. Each Bitcoin “miner” is free to keep or sell the Bitcoin they create.

The Blockchain:

The “blockchain” is a virtual ledger designed to track each and every Bitcoin mining and can be used in other digital applications as well, such as global supply chains, and financial transactions. The “blockchain” bookkeeping ledger is now virtual rather than residing on a computer or in a physical book into which account entries are made. Under all currently known technologies, the blockchain can never be hacked or compromised in any way, but that will undoubtedly change much sooner than most expect.

The virtual ledger is, in fact, a digital chain recording each transaction.  This prevents any single transaction from ever being duplicated or changed, thus it provides security along with anonymity. This latter point presents a legitimate concern held by critics. At this point, there is no known antidote. But one could also argue that such activity goes on under the current system of currencies and there is no means to prevent it. However, it seems well  within the realm of reasonable reality to expect that a virtual solution will indeed be found

Additional concerns:

In addition to the above mentioned concerns, investors say Bitcoin is nothing but the latest speculative investment, going all the way back to the Dutch Tulip Mania. They expect that a crash in price is inevitable. That will likely happen and, in fact, has already happened. No investment goes straight up, there are always up and down cycles.

Many believe another type of cybercurrency will replace Bitcoin, but there are no evident advantages under currently envisioned scenarios,

Another valid concern has recently been expressed, that 1000 people hold 40% of existing Bitcoin, so-called “whales.”. This concentration of power may allow those with evil intent to corner the market and control price. This very point confirms one point in my prediction except that I would hope those whales would have honorable intentions to help mankind in a massively positive way.

Len Ruggiero

417-793-8338

len@lamarchcapital.com

“You’re broke even if you have money,”

A “Generation One” family member recently asked if I had insight about the linked article here citing a situation recently experienced by a Puerto Rican citizen who said “You’re broke even if you have money,”  due to the island-wide power blackout and non-functioning ATMs.

The blog goes on to say, “Big Government is thrilled to see so many banks go cashless. But as the folks in Puerto Rico are learning the hard way, a cashless society isn’t all it’s cracked up to be...”

Well, the simple insight in this situation is that  without electricity, ATMs don’t work. “Duuuuh!”  Then the writer goes on to use that instance to build a naive and biased discussion of the reasons behind banks’ promotion of a cashless society. Despite his naiveté, that specific circumstance inevitably leads to the larger topic of digital money.

It’s inherent in their DNA that banks will promote cashless financial transactions. They rightly argue it will reduce fraud, tax evasion, and money laundering. Unstated, however, is the real reason:  cashless transactions provide banks and government authorities with more control of money and taxing power.

But there are much larger issues at play behind the desire for a cashless society which are only beginning to integrate into the system of money and its transfer. This, along with the broader implications of digital currency, have been discussed by economists, politicians, and banks for some time. It’s simply another manifestation of the huge transformations wrought by the development of digital technology.

Technological changes are increasing at an  exponential  rate, not in a straight  line. That’s because technology uses information already developed to upon which to build new systems, thus  driving  advances  in information flows, analyses and exploitation more rapidly than ever  before.  A math professor of mine once said, paraphrasing, “The greatest weakness of modern man is  his  inability to understand the exponential function.”  No doubt.

We are currently living through changes which are more widespread, epochal, and impactful to economies, governments and societies than mankind has experienced in over 2000 years---or more accurately since the dawn of human history---due to pervasive advances in digital technology.  None of those developments, including cashless societies and digital money, will be stopped. And that’s why Elon Musk, in particular, along with other visionary technologists, warn about the potential danger of robots taking over mankind.

I will get into the deeper, invisible changes surrounding the technology of money later, but to the practical matter of providing for our immediate, foreseeable needs during a weather emergency, others advise we should keep a sufficient amount of hard cash in a home safe which allows us to live for 3-6 months if the economy should collapse or power fails due to a storm or war. As in Puerto Rico, a storm in this country has knocked out power for weeks in some parts of the country, but it’s extremely unlikely the entire grid would go down.

As I’m sure readers are aware, the so-called “prepper” movement takes this potential disaster to the extreme and advises that you should be totally self-sufficient to provide for yourself and family in case of economic collapse or if the power grid goes down. Neither of those events will happen…ever.

Puerto Rico will return to normalcy supported by money from the U.S and other countries.  As just one example, Elon Musk has offered to provide solar power and batteries to Puerto Rico which use the same technology powering the electric cars he developed.  He claims he can power entire cities using his batteries in a stacked array. He can probably do it.  He already has in development the same type of lithium-ion battery to power homes and buildings as well as his cars. This is just another example of technology development visible around us.

But, as you might expect, there’s more to Puerto Rico’s power grid failure that is not discussed. The Puerto Rican electric system is a government entity supported with citizen’s money, namely taxes.  Puerto Rico Electric Power Authority   is itself bankrupt and unable to pay its bills, propped up by the government which continually injects funds into PREPA.  More important, PREPA is rife with corruption.  The fact that the Puerto Rican financial system had already fallen into insolvency and on the verge of bankruptcy---before the hurricane struck---is largely due to graft and waste in PREPA, which, by the way, is responsible for some 70% of the country’s debt. As a result of the inefficiencies so often found in government run entities, the system is an antiquated mish-mash of vulnerable components:  generators, transformers, powerlines, and cable that fail to work in the best of times.

With regard to the U.S. power grid specifically, much of what you hear, mostly from doomsayers, is that there is a risk of the entire U.S. power grid going down. That won’t ever happen, either, for a couple of reasons. The entire system, while it is, in fact,  interconnected not only domestically but also with Canada and Mexico, is made up of so many independent legacy generating, transmission, and computer control systems developed over the last 120 years, that each individual grid can, for the most part, isolate and support itself with the power generating capacity within its own system. No doubt, there would be brownouts and blackouts, but it’s impossible for the entire system to go down all at once or even in a short period of time.

But I digress. The use of pieces of paper and metal as money, or more accurately, fiat money, (which is a book’s worth of information in itself), will inevitably disappear. As a result, paper money and coins will be kept as relics of an earlier time.

Beyond that, there is another technology already in development which will take us to the next level of systems of financial exchange and do away with the need for any kind of money, be it paper, silver, gold or otherwise.  This truly disruptive technology will eliminate the need for banks and will preclude governments---least of all politicians---from interfering in the personal exchange of money between individuals and institutions.

This potential but real threat of Bitcoin and the blockchain to the established financial order and to powerful financial elites recently caused Jamie Dimon, CEO of J.P. Morgan, one of the world’s largest banks, to state that  “…Bitcoin…is a  fraud.”

But the man speaketh with forked tongue. It’s a known fact that every bank in the world is frantically analyzing the blockchain upon which Bitcoin and over 1500 cryptocurrencies are based because it will---and is already---changing the fundamental workings of the global financial system.  This new technology threatens the wellbeing and very existence of every financial powerhouse and its beneficiaries because it brings a truly distributed, democratic process to the functioning of money as a system for the exchange of value.

Dimon speaks from his position at the very top of the established financial and political order.  He speaks not to the point that Bitcoin is a fraud, but rather from outright fear of the ability of this new technology to literally destroy that system he represents. Without a doubt, he fully comprehends Bitcoin’s and the blockchain’s threat to the banking system. Banks will become like horse drawn carriages and buggy whips---a symbol of an antiquated system. Fifty to a hundred years from now, his statement will be seen as akin to those made during the advent of the automobile.

                                                   

You may have heard of Bitcoin, or more generally, “cryptocurrency,” which itself is a technology based on the “blockchain”.  A cryptocurrency   is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank. Bitcoin was the first, and is now only one example, of more than 1500 such currencies recently developed. 

Digital currencies are able to function only because of the underlying technology known as the blockchain.  The blockchain can best be described as a universally distributed and remote (“in the cloud”) accounting ledger digitally connected to all other transactions registered in the blockchain (visualize a DNA strand) in a peer-to-peer network.  The blockchain tracks each financial transaction independent of any other while each transaction depends on the previous one to build the infinite chain of entries in the ledger.

The first distributed blockchain was invented by an anonymous person or group known as Satoshi Nakamoto in 2008 and implemented the following year as a component of his digital currency – bitcoin – where it serves as the public ledger for all transactions

With currently known technology, fraud, theft and hacking can’t occur due to the extremely lengthy and complex  algorithms used in the blockchain and which are currently impossible to decode.  However, my personal opinion is “Never say never!”  Blockchain has potential applications beyond money exchange. For example, it can be used to track medical records, identity management, any type of transaction process, and even food traceability.

So this brings us full circle to earlier comments about governments’ desire to transition to a cashless society. With the implementation of the blockchain, that technology will prove to be the ultimate demise of those very governments and banks that seek to control money and their citizens. Can a one-world government or no government at all be far behind?

Len Ruggiero

CEO, LaMarch Capital, LLC.

10/8/17

Cybersecurity Threats to Organizations

7/25/16

The threat of cybersecurity hacking in organizations, corporations, and enterprises of every type is much greater than most people are aware. Law firms face an exponentially greater risk due to the fact that in addition to the firm’s own vulnerability, their clients’ information is also at risk.

The recent hack of the Panamanian law firm Mossack Fonseca and release of the so-called “Panama Papers,” should be a wakeup call for all law firms. The information exposed in the Panama Papers consisted of 11.5 million pages describing the formation of 214,000 offshore entities for more than 14,000 clients. The exposure could result in financial ruin for some people and has already instigated the resignation of Iceland’s prime minister.

Surprisingly---or perhaps not so surprisingly given the ubiquity of smart phones----the greater vulnerability exists not in legacy client-server systems but in mobile devices facilitated by the use of social media. Cybersecurity guru John McAfee describes how he would hack a digital wallet and empty its contents using a smart phone and social media:

“I will give you an example: Suppose I wanted to entirely empty a person’s [cyber] wallet. Let’s further assume that the wallet is located on a smart phone or other general purpose computing device. In order for the wallet to be used, the device in question must have access to the Internet. These are the only conditions needed for me to empty the wallet, irrespective of the wallet used, whether Myceleum, Samurai or any other software wallet available.

Here’s how I would do it:   I would first plant readily available spyware on the device. I could plant it through an email phishing scheme, or by inducing you to visit a website (A website drive-by is sufficient to set the “download unauthorized applications” flag on Android for example. A subsequent click-through would plant the malware), or using any one of hundreds of other means. If the person owning the wallet was immune to all attempts (extremely rare), then I would use readily available hardware “push” systems and force the malware onto the device from a distance of up to a quarter or a mile away from the device.

Once the malware was installed, it would identify which cybercurrency wallets were being used on the device and log that information. It might also transmit that information to the hacker controlling the malware. It would then install a key logger and a keystroke intercept routine and, possibly, a selective screen capture that captured only the opening screen of the wallets when the wallet applications were executed. This single screen capture, in most cases would contain the amount of the wallets contents. I would need this amount in order to completely empty the wallet. The screenshot would be sent to me at some point. The malware might also contain a “power off simulator” so that after the user believes they have turned the phone off for the night, it is really still “on” but pretending to be off. That way I could empty the wallet while the user was sleeping and would be guaranteed many hours before the user noticed that his wallet was empty.

After the user goes to sleep, I would activate the malware. The malware would execute the wallet app and click the “send coins” button, using the keyboard intercept routine. It would then input my wallet transaction ID, and enter the amount that I had communicated to the device. I would know the amount from the opening screenshot that had earlier been sent to me.

If the wallet required a pin number in order to complete the transaction, I would then wait until the user uses the wallet themselves. My keystroke logger would then give me the pin number. The following night I would have the malware enter the pin number and then complete the transaction as described above.

If the designers of the wallet were clever enough in designing the wallet, I might have to include a software “root” routine, of which hundreds are available, in the malware. Once rooted, I would override whatever keyboard and screenshot precautions had been taken and again proceed as outlined above.

This is just one of many techniques that could be used. All of the malware could be built in a matter of a few hours using off-the-shelf hacker toolkits.”

http://siliconangle.com/blog/2016/06/17/mcafees-new-cybersecurity-firm-john-mcafee-global-technologies-seeks-to-secure-cryptocurrency-products/

Solutions to cybersecurity challenges promise to be the “Next Big Thing” in technology development. New companies are popping up all over the horizon to deal with the multifaceted threats which can be anything as simple as denial of service to complex attacks such as that which destroyed the privacy of 14,000 Mossack Fonseca clients’ data.

WHY A PRIVATE EQUITY PARTNER IS YOUR BEST GROWTH OPTION

When working with corporate executives in the capital raising process, several told me that, to their knowledge, few senior corporate executives were aware of the opportunity to partner with private equity firms to acquire their own company. Thus, this Guide sets out to help those business executives who want to run their own show or for those corporate CEOs who need expansion capital to grow their business faster than might otherwise be possible using only bank debt or internally generated cash. In both cases, the Guide is aimed at those who need a basic grounding in the equity capital raising process because they may have not undertaken such an exercise before.

For the former group who seek to achieve the American Dream of owning a business, private equity is the only real alternative. With a small amount of personal capital relative to deal size, executives can buy out the company they work for or acquire a company they’ve targeted in their industry and do so with relatively little risk. This is due to the fact that when raising debt capital, banks require a personal guarantee. A private equity partner does not require a personal guarantee, thus eliminating the risk of losing personal assets. Personal risk is limited to the amount of personal capital invested in the deal along with the time invested to manage the company for several years.

A common misconception is that in order to participate in a private equity funded transaction, a fixed percentage of personal capital---as with a bank loan which typically requires 20% down payment---must be invested in the transaction alongside the equity group. For example, if a transaction is valued at $10 million, many entrepreneurs believe the equity group will require, say, a 5% or 10% investment by the entrepreneur, thus putting the transaction out of reach of most executives. But that is simply not the case. While equity groups almost always require the entrepreneur to have “skin in the game,” they don’t expect him or her to risk everything they own. Rather, they expect the entrepreneur to have a “meaningful” amount of personal capital relative to their net worth. Thus, someone with a million dollar net worth would be expected to invest significantly more personal capital than someone with a $250,000 net worth.

For corporate executives who seek to grow their business faster, but are capital constrained, private equity is the only answer. Partnering with a private equity group provides additional working capital for every day operation in addition to capital for acquisitions. In exchange for private equity capital, ownership control, but not operating control, of a business must usually, but not always, be relinquished to the equity capital provider. Principals of the equity capital group will become board members to provide guidance and direction in the operation of the business. They will also introduce additional industry resources and relationships, such as attorneys, accountants, joint venture partners and acquisition possibilities. The advantage to current shareholders is the company can grow faster and generate wealth more quickly than if the executive or company goes it alone.

To be sure, private equity is not for everyone or every company. Notwithstanding the substantial ownership control trade-offs, private equity is very particular about who it partners with and where it invests. The private equity firm is charged with investing its limited partners’ (LP) capital in companies in such a way that the return on the LPs’ capital exceeds the return which can be achieved through more traditional and less risky investments. Therefore, companies in which private equity firms seek to invest undergo stringent due diligence and financial analysis with the objective of achieving extraordinary returns at the time of exit three to five years subsequent to the private equity firm’s investment.

On the other side of the coin, the upside potential is significant when partnering with an equity group compared to what an entrepreneur or a company can accomplish using their own, more limited, resources. Once the equity group has made its investment, the CEO has the resources---and is expected---to grow the business as quickly as possible through both organic growth and acquisitions. Growing with acquisitions is the quickest way to increase revenues and earnings. As the firm grows, the integrated enterprise will multiply in value, and, at the time of ultimate sale, equity ownership will be multiplied several times over. This is a true wealth building opportunity.

Please visit our web site: www.lamarchcapital.com

IC/IP valuation

See this textbook which provides three standard methods of valuation. Available on Amazon.

"Valuation of Intellectual Capital and Intangible Assets," Gordon V. Smith and Russell L. Parr.

An interesting fact is that when one looks at SEC filings of public companies, many have stated valuations and specific balance sheet line items for "Intangible Capital" or similar. In some cases there are specific line items for such things as Engineering Drawings, Recipes, Customer Lists, and Noncompete Agreements, to name a few. This is real world IP/IC valuation completed by the companies' CPA firms. What are we missing here?

Marketing "virality"

It has suddenly become very evident to me that the way the world does business is increasingly heading away from

the static web site presence toward the model of business or social networking and virality. (I just coined that word: it’s an adjective describing the viral nature of the new business communication and promotion model). Surprisingly, one can see evidence of this sea change with a subscription to Advertising Age which must keep up with the rapid changes in the ways companies promote themselves.

The gold standard among business networking is LinkedIn which I have witnessed over the last several years as it grew form a startup to a business networking site with over 60,000,000 global members. I am also directly engaged in two real world examples of the old and the new way of doing business.

The old paradigm is exemplified by the business broker I was associated with, which, like most other business brokers, uses the standard modus operandi of obtaining listings of businesses for sale and then describing the company on its web site. Nothing is done to drive potential buyers to the web site. The listings just sit there on the hope that someone will notice. One of the larger brokers I know sends out thousands of snail mails every week to attract buyers and sellers. Again, the old paradigm.

The new paradigm is exemplified by my partner in China. The guy is a serial entrepreneur, having been founder or cofounder of six companies. He is now starting his seventh business, the first time for him in China, and I am sitting on the sidelines watching how he’s going about developing his new business. He uses LinkedIn extensively to contact and attract new relationships that can help get his business off the ground. He is attracting resources who will initially serve as advisors but some of whom may later become board members. These people can connect my partner to other resources, such as financial, legal and accounting help, in the second step of virality. This goes back to the fundamental thesis upon which LinkedIn was founded, that no one is more than six degrees removed from anyone else in the world. LinkedIn has taken that thesis and is gradually changing how the world of business does business!

Companies that don’t adapt to this new paradigm will be left behind. Those that do will see their business expand globally.

How does IC/IP identification and valuation affect the bottom line of the business?

5/25/10

There seems to be a huge disconnect between the academic and intellectual discussions on this and similar sites and the real world of business. A business owner is interested in IC/IP identification and valuation only to the extent that they positively impact the bottom line, reduce taxes, or, at the time of sale, increase the value of the firm.

Economic theory teaches that business owners should make decisions that maximize the value of the firm. This theory could be extended to maximizing profits of the firm as well. That is the ideal but, for numerous reasons, rarely accomplished in the real world of small to medium sized businesses (SMB).

The typical SMB owner is more concerned with minimizing taxes, keeping customers, assuring that his banker is happy, and having sufficient cash flow to meet payroll.

Unless the identification, valuation and monetization of IC/IP can be brought down to the ground level of the firm, unless IC/IP identification and valuation has a direct impact on those issues foremost in the minds of SMB owners, there is no way SMB business owners will care a hoot about intellectual capital or intangible assets.

At my current level of understanding of this very complex issue, which I have been studying and researching off and on for the last five years, it seems to me that the institution having the most impact on this issue for SMBs is the firms’ accountant. For the typical SMB, that accounting firm is a local or regional firm which may or may not be up to speed on the issues revolving around identification and valuation of IC/IP.

Rather, the accounting firm works at the direction of the client who is most interested in minimizing the amount of taxes owed which thus controls the entire directional thrust and activity of the relationship between accountant and client. It is unimaginable to me that a CPA, while auditing the books or preparing taxes of a SMB client, would take the time to explain the complex issues of IC/IP and its potential impact on the client’s business.

Furthermore, with the accounting profession continuing to operate as if we were still living and working in the 19^th Century, there is little chance of this issue ever being brought to the fore by the accountant on duty. His job is to bill the most amount of time he can reasonably get away with and still keep the client happy.

Thus it falls on the accounting profession itself to change its thinking, which in turn will affect the rules promulgated by the Internal Revenue Service, which will then trickle down to the level of the firm and guide the accountants’ work for clients who wish to minimize taxes under generally accepted accounting principles while complying with IRS regulations.

It is a fact that public companies already recognize IC/IP on their balance sheets. It only takes a quick perusal of balance sheets on the SEC’s Edgar site to confirm how widespread that recognition is among publicly traded companies. Could it be that the leading international CPA firms do, in fact, recognize and value intangibles? Perhaps we should ask them.

I have personally been engaged in M&A transactions where millions of dollars of value was stated on balance sheets of several companies for such things as recipes, brands, customer lists and engineering drawings; all of which, by the way, are recognized by the IRS as Section 197 intangible assets which can be depreciated under current IRS regulations. See this link under the title: “Section 197 Intangibles Defined”

http://www.irs.gov/publications/p535/ch08.html#en_US_publink1000208966

The only grey area remaining in my mind is if such intangible assets can be depreciated when internally generated rather than acquired. The IRS does not allow depreciation of internally generated IC/IP assets; they must have been acquired. Yet, again, in the same M&A transactions previously cited, at least one company had millions of dollars of value on the balance sheet for intangibles and had never completed an acquisition!

While the intellectual discussions of these issues will go a long way to changing the accounting profession’s treatment of intangible assets, it remains for practitioners to raise the level of awareness among SMB owners so they can, indeed, benefit from the recognition of intangible assets that often make up the majority of their company’s value.