As we continually tell clients: Even the best products and services often get lost in a crowded marketplace. Trends come and go but a strong brand plays a vital role in a company’s long-term success.
But what is the value of a strong brand?
We who work in marketing already know that companies that work to build a distinct and strong brand enjoy many benefits. These include how customers feel about the organization, reasons why the company’s products/services are distinct from the competition, and even how it affects employee morale. But these are intangible benefits and their values are often hard to measure.
However, there are tangible values associated with a strong brand, according Trevor Hulett, Managing Director of Investment Banking for R.L. Hulett, a well-established financial services firm that offers a variety of services including assistance with mergers and acquisitions. Simply put, Trevor says a stronger brand leads to a higher gross margin on sales of products/services which equates to a higher valuation of an enterprise.
For example, to determine the value of a business to sell or purchase, Hulett considers the enterprise value. The enterprise value includes asset value (tangible values) plus working/current liabilities and all intangible goodwill, which may include its brand, a strong management team, unique technologies or innovations. A major aspect of goodwill comes from its brand.
Hulett says that a company’s enterprise value is increased through a strong brand, as well as its value in attracting potential investors or buyers. These investors and buyers are willing to pay more for a company with a strong brand because after all, a strong brand leads to: better name recognition that breaks through a cluttered market; “word of mouth” endorsements; better customer loyalty; and an engaged and excited workforce. These benefits add to a company’s success and therefore, the overall value.
Companies, regardless of size and industry, that have services or products that are perceived as being higher in the value chain in terms of strong brand, can charge more. That enhances the gross margin, according to Hulett. Strong brands are good for ongoing business, therefore, but they are also advantageous when it attracting and negotiating with investors, he explains.
Brand is a major aspect of the goodwill or “multiples” that can be assigned to company’s worth in addition to the EBITA (earnings before interest taxes depreciation amortization). A higher gross margin attracts more potential buyers, which will drive a higher multiple on the earnings and a higher purchase price.
Companies who can position themselves better than their competitors will benefit from better pricing leverage. And, as buyers conduct their due diligence with customers, good brand feedback can drive up the multiple on a higher EBITA.
While having a strong brand can add to a company’s value, it is important that be “institutionalized” and not too dependent on the founder or other individuals, so that it can be transferred to new owners with minimum interference.
Hulett cites the importance of companies partnering with strategic marketers who can help to create and shape their brands so that they can be leveraged to grow and enter new markets and new relationships. Successful brands should be clearly defined and well communicated, he says, but also should be “scalable” so that a local brand can grow nationally, or a national brand can become a global brand.
And, like tangible assets, brands must be continually monitored and maintained. They are dynamic, not static. If the opinions of industry leaders and customers change in a negative way, the value of a brand can be reduced.
If you are considering selling, purchasing or investing in a company, I’m sure Trevor Hulett could offer you some good advice. He can be reached at 314.721.0607.
And if your company has the best products and services but is lost in a crowded marketplace, we’d be happy to share our approach to building strong brands. Give me a call at 314.727-5850 or fill out the form below.