Valuing a brand for investment or sale
Whether a business starts with a fanfare backed by seed funding or bootlegs from the kitchen table, chances are that it will need funds for growth at some point; further down the line there will potentially be a change of ownership via trade sale.
A key part of raising funds or attracting a buyer is calculating the value of the business that’s been created and the brand value is a core part of this.
Some components of business value are relatively easy to quantify such as turnover and profit margin, the size of the customer base and lifetime value of each customer, plus any assets owned by the business.
It’s slightly trickier to quantify a company’s brand but it’s a crucial element of the overall valuation. Apart from reflecting investment already made in marketing the business, the brand is a key indicator of future strength. Any customer forecasts provided in the financials need to be corroborated by the brand positioning. If they’re not, it casts doubt on the financial element of a company valuation. Brand reputation is also key to building trust with potential investors or buyers: how the brand is perceived by staff, customers and suppliers will all be examined during due diligence. “If the buyers think you are pulling the wool over their eyes on this then they will lose trust in you about everything else,” says serial entrepreneur, Jamie Waller.
Brand strength is not only derived from awareness, sales and market share. In our information age, brand performance is increasingly measured by their impact on wider society, including the treatment of staff and their reputation as an employer, the commitment to environmental sustainability and charitable endeavours.
Although many marketeers and entrepreneurs intuitively understand the benefits of investing in and building a strong brand, it’s more challenging to quantify in financial terms. The YouGov Brandindex attempts to rank 1,500 brands according to impression, quality, value, satisfaction, recommendation and reputation; translating this into tangible value is another matter. Elsewhere, the Reputation Institute, a global business intelligence firm, reports a dramatic shift in the way companies are valued in the past 40 years; traditional notions of physical and financial assets are making way for intangible assets that all contribute to reputation. They estimate that 84% of a company’s value is now based on reputational factors.
It’s a view corroborated by Matt Davis, Partner at mid-market corporate finance advisor, Spark Advisory Partners, who suggests that in many respects the brand reputation is more important for an investor or buyer than physical assets or IP.
He also commented that brand impact on company valuation differs between market sectors. In the staffing sector for example, the multiple is typically between 6x and 8x, and it’s the businesses with the strongest brands that typically achieve the premium valuations. He added that the more consumer-focused the business, generally the more impact brand reputation has on the business valuation.
One thing is for sure, a strong brand attracts more potential buyers and investors; more interest often leads to competing bids and a higher valuation.
At the end of the day, the valuation and price paid for a business is simply what the investor or buyer is prepared to pay for it. Matt Davis cites the example of CocaCola’s investment in Innocent Drinks as an example of brand value; the business had invested heavily in building a healthy, quirky alternative in the crowded soft beverage sector. In the year that CocaCola invested £30m in Innocent, valuing the company at approximately £170m, it was losing nearly £9m a year. Recognising the value of the Innocent brand, the significant investment that had been made in it and its potential rather than simply evaluating the financial assets, CocaCola eventually acquired all of the business in a transaction reported to be worth more than £350m.
Brand reputation and trust are not quickly won. A hastily put-together direct mail campaign or a change to the copy on a website is unlikely to have the desired impact. Jamie Waller, who has sold several businesses and spoken to a number of other entrepreneurs about their journeys for his book, Unsexy Business, said they activate their brand plan 18 months ahead of seeking a sale.
The mission and vision of the business, along with the value proposition, need to be agreed by the management team. Whilst it’s easy to assume everyone is on the same page, it pays to check, especially if the business has evolved over time. The business values are also key: ensuring that staff have affinity with them (even better if they have input into deciding what the values are) and that they underpin all aspects of the company’s activity with its different stakeholders – its employees, customers and suppliers. Agreement on these elements provides a foundation for consistent brand communications.
As consumers, we rarely make a purchase decision based on a single interaction; this is even more true in a business-to-business (B2B) environment. It’s helpful to map the decision-making process from a need or problem arising to the point of purchase and identify touchpoints along the journey where a brand can deliver its messages. If the messages, visual execution and channels are consistent and appropriate to the audience, brand awareness will naturally follow.
It’s pretty obvious that positively engaging with stakeholders will build a healthy pipeline. Done well, it also builds relationships leading to brand advocacy; word-of-mouth recommendations – be they staff talking positively about their employer or customers talking to their network – are an influential sales and marketing tool, as well as free. Watch this space for future blogs covering our thoughts on the role of brand advocates!
Selling a business or seeking investment for growth is undoubtedly a busy time for any business and its management team. Whilst the brand reputation might have languished at the bottom of the ‘to-do’ list previously, today’s buyers and investors offer a premium valuation for those businesses that prioritise it.