If branding is not part of your company’s value creation strategy, you’re leaving money behind. Brand and its equity is one of the most valuable assets that a company has and the driver for financial success. When looking to exit, companies can command larger transaction multiples based solely on the brand and the strength of its intangible assets.
Let’s back up a step. What a buyer is willing to pay for a business reflects their perceptions of the future earnings potential of its assets, both tangible and intangible. Buyers are measuring cost versus risk against future performance. Tangible assets are sometimes measured by the replacement cost of the asset. Intangible assets include any other assets that enable a firm to earn excess returns beyond that earned from its tangible assets. Apple, for example…
Branding And Positioning Drive Value Creation
This is not a new idea. According to Simon and Sullivan, financial markets view brand equity as “the capitalized value of the profits that result from associating that brand’s name with particular products or services. Anything that might affect perceptions of a brand, positive or negative, will affect a firm’s stock price due to those perceptions impact on future earnings.” It’s all about what a buyer spends on a business today for the promise of what she/he can sell it for tomorrow.
The importance of intangible assets and their impact on value has exploded. Ocean Tomo LLC, the Intellectual Capital Merchant Banc™ firm, publishes an annual study of intangible asset market value. Last published in early 2015, the data is still quite relevant. In 2015, intangible assets had risen to an unbelievable 84% of S&P 500 market value. These figures mean that more than four-fifths of the S&P 500’s value is attributed to human ideas, intellectual property and imaginary/perceived value. Given technology’s impact on business and the increasingly critical need for brand differentiation, it’s safe to assume the intangibles percentage of the S&P today is probably higher than 84%.
Brand equity and goodwill are the core drivers of the promise of future performance. Strong brands with good reputations have 31% better total returns to shareholders.1 Maximizing equity and goodwill over time is a function of a well defined and consistently leveraged brand strategy across both the market and the enterprise. Companies that do this well and do it over time are far more desirable in the minds of buyers. When assessing the importance of investing in building brand for value creation and increased transaction returns, consider these three points:
1. Strong Brands Reduce Acquisition Risk.
Like any financial investment, considering risks associated with buying a business is critical for every buyer. The job of due diligence is to uncover risk elements that may impact future performance. A strong brand plays a significant role in the business’s ability to thrive after acquisition. If the brand is well known and loved by customers, with a high level of brand loyalty, the risk associated with acquiring the business is dramatically reduced. Strong brands, both business and consumer, are safer acquisitions.
2. Strong Brands Sell For Higher Multiples.
Part of the art and science of business valuation is determining what multiple to apply to pre-tax earnings to determine a purchase price. That multiple is based largely on two things: the current trend of transaction multiples within the industry of the business, and the perceived risk of future success. With the reduced risk by a strong, well-known brand, multiples are consistently higher and sellers have significantly greater leverage at the negotiating table. The long list of financial benefits of building brand, both internally and externally, are extensive and well known. Layering those intangible brand equity benefits with traditional valuation models will significantly drive up multiples putting the seller in an excellent negotiating position. Simply, buyers pay more for a strong brand.
3. Strong, Meaningful Brands Attract People, Buyers, Too.
The psychology of purchase preference is well studied. Brands that are crafted with meaning and purpose, those with excellent products or services, and those that deliver a superior customer experience consistently over time attract the dominant share of the market. Strong brands create preference and loyalty and simply make those engaged with the brand feel confident and safe in their purchase and brand relationship decisions.
Acquirers of businesses are driven by the exact same psychological influences. There is no difference, the psychodynamics are the same. Whether consumer or B2B, everyone makes decisions both rationally and emotionally. So what a business does to build brand has the same power and positive effect when it’s time to sell. Strong brands attract better buyers.
The brand you build to improve market performance is inextricably linked to the business’s sellability and overall value. Without question, brand and positioning strategy matters. And when implemented as a corporate philosophy for value creation from the beginning, a way of doing business, shareholders will realize outsized investment returns.
The better brand always wins. Be the better brand.
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