Brand Diligence – Seeing Behind The Curtain

Brand Diligence – Maximize Investment Potential, Minimize Risk

An 8 minute read on brand pre- and due diligence and value creation leveraging brand strategy and diligence to reduce risk and improve investment outcomes. For private equity and venture capital, how value creation happens has finally grown up. Once limited to financial engineering and operational improvements to increase value and investment outcomes, building brand equity is now the critical third leg of the value creation stool. Finally, the industry woke up to the significant power of intangible brand equity and creativity to accelerate market performance, increase equity value, and reduce risk—all drivers of investment success. We’re glad the space is finally embracing brand. Not sure what took so long. Well, that is not entirely true. We know what took so long. Investing in the intangibles of brand and projecting a specific return on that investment is notoriously difficult to measure. It’s not easy to predict the return on increased brand love or loyalty. Or to measure the value of what people feel. But you will see it impact market performance and increase transaction multiples. Brand value cannot be adequately reflected on financial statements. As a result, many investors reject investing in building, growing, and protecting the equity in, ironically, their most significant asset. Big mistake. Investors are losing leverage while leaving money on the table. PE/VCs are historically numbers folks, and in the last 25 years, operators too. The intangibles around brand were just a bit too amorphous, leaving the idea of building brand equity out of value creation strategies. But the value in building brand equity is real and easily seen in the capital markets. Roughly 35% of Apple’s market cap is intangible brand equity; some argue considerably more. According to the long-time purveyor of intangible asset trends, Ocean Tomo1, intangible brand equity now comprises 90% of the value of S&P 500 companies. This is a staggering number. As found in Edeling & Fischer’s meta-analysis, on average, improving brand equity by 10% can grow firm value by 3.3%. Intangible brand strength builds very tangible financial value. In the last half-century, we have witnessed this shift from tangible to intangible factors as drivers of financial value. According to a 2018 study by risk management and insurance business, Aon, as reported in IP CloseUp, intangible assets have come to represent $21 Trillion2, more than five times that of tangibles, like real estate and equipment. A strong brand is the core driver of sustainable performance and increased asset value. There’s no doubt—building brand builds wealth. So Where Is Brand Diligence? Given the scope of empirical data around the financial value of brand equity, why is “brand” so overlooked in the acquisition target pre-diligence process? Or the due-diligence process? It’s mystifying. Diligence is typically a backward-looking valuation method where brand assessment is decidedly future-looking. Brand strength plays a seminal role in a business’s success and is a crucial indicator of future success. Leveraging brand diligence provides a predictive advantage, greatly mitigating risk while increasing the likelihood of investment success. One would think that as brand equity has become a critical strategy in value creation, assessing brand strength for potential acquisitions and mergers would be adopted as a standard best practice. Shifting a paradigm is never easy. Investment stakeholders seldom understand the contribution a strong brand makes to value creation and investment outcomes. (As an aside, when we speak of “brand,” we are not talking about logos or colors, icons or fonts. It is something far more reaching than that. We cover the misconception of the word “brand” here.) Investment stakeholders often do not bring a brand understanding and mindset to the table. Regardless of the ample evidence that brand decisions made and just as important, decisions avoided can affect an organization’s long-term ability to achieve its investment objectives.
When evaluating a potential acquisition or merger, evaluating brand strength across the business and in the market adds an invaluable and essential added layer of analysis to investment potential and risk assessment. Brand strength is a core driver of goodwill and financial value and a proven transaction multiplier making brand diligence as fundamentally important as financial and operational diligence when evaluating investment potential or evaluating a merger.
While some convoluted financial methodologies attempt to quantify brand equity strength, none consider the intangible brand attributes that do not make it on the balance sheet yet play a critical role in business performance and asset value. Assessing these brand attributes is a specific and defined discipline done by brand strategists. Brand intangibles used to include things like patents, IP, trademarks, design and copyrights, distribution and manufacturing agreements, and such. But what really drives value, performance, and sustainability are the intangibles that are often never assessed—perceptions, feelings, love, trust, preference, salience, differentiation, and a host of other attributes that, when strong, drive dramatically increased performance and value, and ultimately increased transaction multiples for stakeholders. Many investors and bankers struggle with seeing and evaluating what makes a strong brand likely to deliver the expected benefits and future success. What is needed is a robust appraisal methodology of a brand strength done by brand strategists who’ve built and positioned brands for a living with the experience and objectivity to assess the intangible attributes of a brand. Pre Diligence It makes sense to look at brand strength for acquisition desirability prior to the point of financial diligence. By the time you’re running the numbers, it’s too late. Brand pre-diligence first ensures acquisition attractiveness and strategic alignment with stakeholder investment and exit objectives and a clear path in the market for success. If one plus one is not three or the target does not satisfy investment criteria, then further diligence is unnecessary; the asset doesn’t qualify. For PE/VCs, brand pre-diligence makes all the sense in the world as a standard business practice. Well-positioned brands with strong equity attributes and strong alignment with market potential indicate reduced risk and a greater likelihood of future success. Strong internal brand cultures well aligned across constituents indicate a strong enterprise with a focused and sustainable brand position. Targets with high brand equity and strength scores and strong target desirability scores indicate a high return potential and investment desirability for stakeholders. Mergers require assessing both the acquiring brand and the to-be acquired brand for cultural compatibility, brand architecture, and brand integration, and assessing the compound benefit of bringing two brands and cultures together. Understanding where brands and cultures align and diverge is essential. Give too little attention to brand or fail to understand a brand’s strategic role, and investors may overpay. It may also put constraints on future business strategy or build high barriers to effective integration of two companies. There is a lot to consider. A Platform For Brand Diligence Evaluation Any solution for diligence must be quick, cost-efficient, and executable on-demand and in short order. Speed is essential to timely decision-making. To provide rigorous brand assessment for private equity and venture capital, we leverage an evaluation platform that facilitates efficient yet granular examination of brand strength. Unbiased evaluations are implemented by veteran brand strategists. The platform’s output produces a comprehensive scoring model indexing brand equity strength or weakness across a complex array of tangible and intangible attributes, positioning alignment among constituents, and a brand’s alignment with market opportunity. The data scores indicate investment desirability and alignment with stakeholder investment goals and are combined with market and competitive research findings in a Brand Diligence Assessment telling a complete brand strength story. When combined with a firm’s standard financial and operation diligence data, this analysis offers the most comprehensive level of analysis available and a significantly more informed investment decision.
Brand diligence Scoring Tables- Example
An extremely time and cost-efficient process, the brand due diligence tool is designed for granular rigor but also to facilitate high-level views of the data by rolling up brand equity scores across brand attributes and due diligence desirability categories into a set of master scores. Scores for brand strength, brand assets, and brand culture collapse into a total Brand Equity Strength score. These scores are combined with the Market Opportunity Alignment score to produce a metric for scoring the brand’s Overall Brand Equity Strength. The target desirability categories are scored individually and in aggregate, providing a consolidated score for overall target desirability strength. These are sample screens, please reach out for a comprehensive overview of the diligence tool.
The Evaluators Matter Building brand equity is an extension of business strategy and tactics across creative execution at all points of customer engagement. Assessing intangible brand attributes is a subjective process requiring specific and deep brand development experience and skills. These are unique skills found in well-oiled brand strategists. Typically, these kinds of analytical skills are simply not resident in PE firms. Again, a bit mystifying given that building brand equity has become a standard operating best practice for value creation and for an added layer of acquisition assessment. We’ve found it is generally just not there. And it is certainly not taught in business school. Quality brand assessment demands world-class talent that crosses over from creative brand positioning and development to investment banking, talent that can provide an unbiased assessment of the intangible attributes that build equity. This is not a job for bankers or accountants who think of brands largely in static, passive terms. This work is best done by brand strategists who are fully aware that brands can actively alter demand patterns and shape future performance. They know a brand’s value is more volatile than most other assets and that creative expression can directly impact performance. They know that love and salience can drive loyalty and that a single misstep for a brand can wreak havoc on a business. Brand is a complicated and all-encompassing asset with tremendous power to accelerate value and performance. It is something to be managed and leveraged. Adding brand diligence as a standard best practice provides stakeholders a predictive advantage that mitigates risk and improves the likelihood of outsize returns. The industry has been frustratingly slow to integrate a strategic brand focus into value creation strategies, the due-diligence processes, or integration activities following a merger. We’re on a mission to change that. Those developing best practices around building brand equity for portfolio companies and assessing brand strength for investment targets will realize the very real financial benefits. Brand’s time has come. Better get on board.

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  1. https://www.visualcapitalist.com/the-soaring-value-of-intangible-assets-in-the-sp-500/
  2. https://ipcloseup.com/2019/06/04/21-trillion-in-u-s-intangible-asset-value-is-84-of-sp-500-value-ip-rights-and-reputation-included/