History shows that branded companies garner the highest valuation in a sale. With the right information gathered and the selling message expertly crafted to highlight the strengths of the brand, the highest valuation is achievable.
History of the word “brand”
According to the Webster-Merriam Dictionary, the word “brand” comes from the Old English word “baernan,” meaning to burn or make a mark by burning with a hot iron to attest manufacture or quality or to designate ownership. The word “brand-name” has its origin in North America and means “having a reputation and loyal following”.
Defining the value of a brand can most often be traced to the beliefs consumers have of the attributes of the product and how it satisfies their desires. The degree to which consumers believe that a product will consistently satisfy their desires will determine how often they buy a product, how much they are willing to pay and how strongly they will advocate someone else to buy the product.
Historical data compiled by Securities Data Corp. over the last five years for completed transactions involving brand-driven consumer products companies versus transactions involving nonbranded consumer products companies suggests that brand-driven deals garner an average of 25 percent more value.
Thus, building the foundation of information to support the strength of a branded company, optimally positioning the brand to buyers and perfecting the timing of the sale with the assistance of an investment banker can lead to a significantly higher valuation. During the process of building a brand, the owner can take several steps that will lead to a premium valuation.
Market data
During the process of building a brand, the current owner should periodically collect information about who buys the product (age group, sex, economic status, etc.), frequency of purchases and why the purchase was made. Market share data collected will also be helpful in positioning the brand.
Market research firms can collect this data through various methods or the company may collect it through product registration forms, contests or online surveys. The company should also maintain historical price elasticity data (if price was increased or decreased in the past, how did that impact sales?).
All of the market data collected will often indicate the brand’s strength in the market and create the foundation an investment banker will use to position the brand for a premium valuation during the sale process.
Financial data
The owner of a brand should be aware that potential buyers will analyze the revenue stream for growth, compare gross profit margins to a peer group and analyze free cash flow. Revenue growth achieved by entering new channels, new demographics or new geographies will garner the highest interest from buyers.
An investment banker will assist in crafting the best positioning of the brand’s growth. Comparing gross profit margins of a brand to a peer group will be helpful in determining how to position the brand (i.e. luxury, premium or other classification).
In addition, an investment banker will analyze free cash flow after normalized research and development to determine how much investment is needed to maintain the brand’s competitiveness.
If the argument can be made that future R&D will be minimal, the buyer will place a higher valuation on the business.
Timing of a sale
The stability or growth of the revenue stream during an economic cycle is also important. Brands that maintain revenue and profitability or even grow regardless of the economic cycle garner the highest valuation.
However, brands that are counter-cyclical will sell for high valuations late in an upturn, while brands that are cyclical will sell for high valuations during the low point in an economic cycle. An investment banker will assist in gauging when the market will place the highest valuation on the brand.
The investment banker adds value in many ways when selling a brand. He or she will:
1. Expertly craft a unique message to each strategic buyer to highlight the strengths and opportunities the brand will bring to that buyer.
2. Combine the facts in the market data with the financial data to sell a strong message to buyers that customers buy the brand because they believe it satisfies their desires and that they are willing to pay a premium to have their desires met.
3. Present the “once in a lifetime” opportunity to buy this brand to financially qualified and strategically interested buyers in a coordinated process, resulting in the best financial and strategic terms of the sale.
John Tilson is a director at Brown Gibbons Lang & Co. He specializes in mergers and acquisitions, with strong expertise in the areas of manufacturing, business-to-business services, branded products and value-added distribution. Reach him at (312) 658-1600 or at [email protected].
