How Brand Influences Company Valuation
I was recently asked by a prospective client to discuss how Quist Valuation thinks about brand in a valuation engagement:
- What are the dimensions of brand value?
- How do we consider the stages of brand development?
- What approaches are used to measure brand value?
A company’s “brand” encompasses a variety of concepts: it is your trademark, your trade name, the quality of your product, your technology, your reputation. A brand consists of more than a bundle of tangible, functional attributes; its intangible, emotional benefits, along with its “identity,” frequently serve as the basis for long-term competitive differentiation and sustained loyalty. How you manage those brands is an essential piece of building value for your organization.
Brands are far too important to be left to brand people and marketers. It is the responsibility of the CEO to nurture the brand.” – David J. Haines, Chairman of Grohe, the leading global provider for sanitary fittings.
Brand value is important in many of the businesses we work with. Identifying and quantifying intangible assets driven by brand value are the purpose in many of our valuation assignments. In fact, approximately 20 percent of our work is for Purchase Price Allocations (PPAs) – projects that quantify the portion of the price paid for a target company that relates to trade names/trademarks, customers, technology, employees, and hard assets. Even when the allocation of tangible and intangible assets is not the objective, the strength of a company’s brand value is critical for determining the reasonableness of 1) growth rates (i.e. strong brand value helps penetrate new markets and maintain current sales); 2) margins (i.e. strong brand improves the value of the product and results in greater pricing power); and 3) risk (i.e. strong brand value can increase switching costs for customers or facilitate the expansion of product offerings).
We have extensive experience with brand value in the food products industry. Our clients have included national and international producers of health food products, bread, coffee, cheese and beer. Some of these companies held portfolios of localized brands while others have international recognition. One area of the food industry that has seen significant growth and a run up in valuation in recent years is the natural and organic food sector. We are fortunate to be headquartered in Boulder, Colorado a hub for the natural foods industry. While the natural and organic foods segment still makes up a small percentage of the overall food industry, it has become an ever-increasing crowded market where competitors can make unsupported claims about food safety, nutrition and health. As such, building trust with the consumer is an important factor in growing brand value. This uncertain landscape is a benefit to participants that can establish and communicate value through their trademarks, trade names and packaging. Nutritional education and the messaging of a company’s vision and mission communicated through social media are important drivers of growing brand awareness.
Obviously, branding is not limited to food products. It is a key part of any business that sells a product that can be confused with its competitors. A company can leverage its brand to show many attributes including: longevity, reliability, quality and value. In many cases, the strong performance of a single branded product allows the company to market related products. We have seen this strategy play out in many industries including ski and cycling clothing, western-wear clothing and sports clothing technology. Beyond traditional consumer brands, brand value is used to sell tools, equipment and specialty chemicals.
There are generally three ways to determine the value of a brand:
- Assess the cost to build and replace the brand;
- Assess the cost to buy the brand; and
- Assess the additional profit earned by using the brand.
For brand value, the second and third methods are generally preferred. We have a database of licenses that we query for license agreements related to similar products. These arm’s length agreements allow us to determine what rate a participant will pay to use the trademark or trade name associated with a brand. We can also determine how the business is improved by the brand by considering the profit margin earned with the brand compared to industry profit margins. In practice, the consideration of brand value also manifests in the selection of a comparable market multiple to apply to the company and in the determination of an appropriate discount rate to apply to the company’s projected cash flow streams.
Brand is an essential piece of determining a company’s overall Strategic Value. Here at Quist Valuation, we look at five main drivers to business value: 1) Financial Value; 2) Strategic Value; 3) Organizational Value; 4) Customer Value; and 5) Employee Value.
Strategic Value considers industry dynamics such as barriers to entry, capital intensity, industry concentration, regulatory environment, and industry life-cycle. It takes into account an entity’s competitive position and brand recognition, and it measures an entity’s growth opportunities and how it responds to external factors. A well thought out and written business plan that includes a company’s brand strategy can really add to the strategic value of a company. The ability to clearly articulate a company’s vision and cause increases its value proposition to the consumer. With these strong messages, stronger pricing power, brand loyalty, and higher switching costs can drive revenue growth, profit margins and reduce risk.
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