Since human capital can be extremely valuable, consideration should be given to including it in transactions (such as licences and sales/purchases) to maximise the benefit of these transactions.
What is human capital?
Human capital is the knowledge of an organisation, which includes ‘know how’, experience and ability vested in an organisation’s employees. It is not a tangible asset, like a building or equipment, but it can be just as valuable to an organisation.
Why include human capital in your transactions?
If human capital is included in a transaction, the recipient may obtain a greater benefit and the provider may obtain a higher price.
Consider a Research and Development team that has worked on the development of a form of technology for 10 years. Then imagine the position of an organisation that acquires that technology through a purchase or licence. The employees of each organisation would have significantly different knowledge and experience concerning the technology.
By passing on the human capital from the first organisation’s employees to the employees of the second organisation, both parties stand to benefit. Not only could the first organisation obtain a higher price, the second organisation could stand to gain considerably from the technology.
How to include human capital in your transactions
Consideration should be given to how both parties could most benefit from including human capital in the transaction.
Firstly the human capital needs to be identified, defined and marketed to the recipient. The method of passing on human capital must be considered. Some ways to pass on human capital include providing access to the vendor’s/licensee’s employees through attendances, offering a temporary or permanent staff transfer arrangement, establishing a ‘help line’, or offering regular or intensive initial training.
Human capital, by its very nature, is not conducive to accurate measurement or definition and, therefore, provides a degree of risk in relation to its inclusion in transactions. Accordingly, both parties to the transaction need to consider the following issues:
Recipients:
- Ascertain the extent and type of knowledge held by the provider
- Verify the knowledge will be conveyed in a beneficial way
- How can the human capital be measured so that you can prove a breach if necessary?
- What value should you put on human capital when involved in negotiations?
Providers:
- How can you best identify and market your human capital to satisfy a recipient of its value to attract the maximum price?
- How can you ensure that including human capital in a transaction will not diminish the value of your own organisation?
Care must be taken to ensure a contract adequately identifies the human capital to be included and how it is to be measured and provided.
When negotiating your next transaction, consider the following:
- Can you add value to the transaction by transferring or receiving human capital?
- Who is vested with the human capital?
- What is the nature of the human capital?
- What is the extent and method of providing human capital?
- What are the terms of the provision of human capital, including the permitted use and disclosure of the information, so as to preserve its confidentiality and value?