One of the most overlooked aspects of selling and valuation is the value of branding to a business for sale.
What does a valuable brand look like?
You can see it, even feel it, at every level of marketing. It permeates the corporate culture. It makes customers both happy and loyal. It clearly communicates the story, and values, of your business to the world. Whatever good branding may or may not be, one thing is for certain: Buyers look for it, recognize it, and reward it in a business for sale.
In this article, we’ll discuss how the brand of your business affects both valuation and the sale process. We’ll cover how buyers view a well-branded business, and highlight two ways a strong brand can increase the value of your business when it comes time to sell.
What Is the Brand of Your Small Business Worth?
Like many forms of intellectual property, it can be difficult to quantify the value of a small business brand. Great branding can seem like one of those nebulous, I-know-it-when-I-see-it things.
While drawing parallels between public companies and small businesses can often be misleading, it’s interesting to see what some of the most well-known brands in the U.S. are worth. Forbes compiles an annual list of the world’s most valuable brands using a method that is not unlike the market approach used to value small businesses in the lower middle market (annual sales of $2M to $25M).
There are few surprises at the top of the Forbes list, although the dollar amounts are breathtaking nonetheless. The Apple brand alone is valued at $241 billion, with Google not far behind at $207 billion. Additional research shows that strong brands with good reputations create better returns to shareholders and attract more investment. According to an analysis by the Marketing Accountability Standards Board (MASB), brand value contributes an average of 19.5% of enterprise value across all companies.
Not unlike public companies, a significant portion of the value of many businesses for sale in the lower middle market is attributed to intangible assets in a catchall category called Goodwill. This is especially true for many service or “asset-light” businesses that have little in the way of hard assets like equipment and inventory.
At a basic level, the value of Goodwill is the difference between the purchase price of the business and the value of the company’s hard assets. The formula many prospective buyers use to determine business value (purchase price in this case) is:
Value = Cash Flow x Multiple
Regarding the elements in the equation above, a strong brand can contribute to an increase in all three.
Strong Branding Can Increase the Valuation Multiple
Part of the art and science of business valuation is determining what valuation multiple to apply to pre-tax earnings (i.e., cash flow) to come up with a probable purchase price. The valuation multiple is based largely on three things: The industry of your business, how your business compares to similar businesses in your industry, and the level of risk associated with owning your business.
If businesses like yours tend to sell for a multiple between four and six, then you obviously want to capture the high end of the multiple range. So, how do you boost the valuation multiple for your business? Your business will need more of one thing and less of another.
Strong Branding = More Cash Flow
The strength of your business brand should be reflected in the cash flow and financial performance of your business. The brand should attract customers, give your business an edge over competitors, generate sales, and retain satisfied customers who continue to do business with your company – and tell others to do the same. All of this should be evident in the gross revenue of your business.
There are also ways in which a strong brand can decrease operating expenses. Businesses with good branding tend to spend less on costly, one-off tactical marketing campaigns. They may also have less employee turnover, and a better chance of securing favorable terms with vendors.
Strong Branding = Less Risk
The M&A (merger and acquisition) process transfers risk from one party to another. As with any financial investment, the risks associated with buying your business — both internal and external — will be top of mind for any potential buyer. While you may not think about the risks inherent in your business on a daily basis, a buyer will work hard during due diligence to uncover every last one.
The risk that keeps buyers up at night is the uncertainty of how your business will perform when you, the small business owner, are no longer at the helm. Ask yourself what it is about your business that pulls in a steady stream of customers. If much of it depends on you as the owner, then there is a big question mark (i.e., risk) as to whether or not the business will continue to thrive under new ownership.
On the other hand, if you’ve created a brand that customers know, love, and flock to, then you’ve gone a long way towards reducing risk in a buyer’s mind. Good branding can also give your small business a competitive edge in the marketplace. It is a critical element of a successful business that is also easily repeatable by a new owner: You’ve done the heavy lifting. The buyer just needs to continue to nurture the brand you’ve already established.
Well-Branded Businesses Are Easier to Sell
During the sale process, buyers are typically comparing your business to other businesses for sale that have piqued their interest and match their investment criteria. Professional buyers like private equity groups may review as many as 1,000 opportunities in a year to complete just 10 M&A investments. The best buyers are smart, determined, and extremely busy.
Branding Helps Make a Good First Impression on Buyers
Branding can often be the thing that gets your business noticed by serious buyers who are sourcing a number of potential acquisition targets. Strong branding can also tip the scales in your favor if a buyer is trying to decide whether to spend precious time and energy looking at your business versus another opportunity.
Investment-minded outsiders – including not only buyers but business brokers, M&A advisors, and lenders – typically look at just a few things to make an initial judgement about your business:
- Three years’ worth of financial results
- The website of your business
With the above information in hand, the following should be clearly evident to any business broker, prospective buyer, or outsider looking in:
- What products and/or services your business sells
- What differentiates your product/service from competitors
- Who your target customers are
- How you attract customers
- How your business makes money
- Which products/services are most profitable
- How your financial performance compares to industry averages
A strong brand impacts all of the essential characteristics that buyers care about, especially the first four on the list above. The easier it is for potential buyers to answer these initial questions, the easier it will be to advance the sale process.
The story of any business is told in two languages: Narrative and numbers. Ideally, those two stories should be in perfect harmony. Buyers are quick to notice a disconnect between how your business is presented in the marketplace (i.e., branding) and how that translates to financial performance (i.e., sales, margins, pre-tax earnings and profitability). Too many questions too early in the process can result in buyers losing interest in your business and moving on.
Strong Branding Advances the Sale Process
For business brokers and M&A advisors, selling a business with a fabulous brand is a joy to represent compared to the alternative. Anything that can smooth out some of the bumps in a complex process is a win!
One of the things Allan Taylor & Co. is known for is creating a best-in-class Confidential Information Memorandum (CIM) for our business owner clients. The CIM is the primary marketing document that business brokers and M&A advisors use to represent the opportunity to acquire your business to qualified buyers.
It is much easier to create a CIM for a business that has built an excellent brand and marketing presence. The best brands tell the story of the business in a compelling way, which is exactly what the CIM does for its intended audience of buyers.
A beautiful, professional CIM will impress the buyer and make them want to learn more without much convincing. It can be harder – and take longer – to “wow” buyers and get them interested in pursuing the opportunity to buy a business with a ho-hum brand.
A Strong Brand Pays Off When Selling Your Business
To be clear, a strong brand won’t make up for poor financial performance at your business, or hide a multitude of other sins when it comes time to sell. But the brand you’ve built will always play a key role in both the sellability and overall value of your business.
At the end of the day, the quality and strength of your business brand is a reflection of how much you’ve cared about your business over the years. And buyers want a business that has been well-tended by the previous owner at every level.
You only get one chance to make a good first impression. Are you building a sellable business with a brand that someone else would love to own? Whatever questions you may have about selling your business, the advisors at Allan Taylor & Co. are here to help you find answers. Let’s talk.