
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.
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.

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