In business, mergers and acquisitions provide a competitive edge for scaling and growth.
For many entrepreneurs, building a business from the ground up can feel like the ideal path, especially when driven by a strong mission and the desire to make a unique impact. For others, buying or acquiring existing businesses is the preferred route to ownership and growth.
What is a Merger and Acquisition?
Mergers and acquisitions (M&A) are complex transactions that require a specialized team, often including an M&A broker, lawyer, and CPA, to consolidate the assets of two or more businesses. Whether on the buying or selling side, there is a specific process to follow.
For buyers in the M&A process, a key early step is to establish clear criteria for identifying and selecting the right business. This includes both business-specific and financial criteria.
Business criteria typically include elements like company size or scale, ownership structure, customer base, partnerships, suppliers, and geographic location.
Financial criteria, on the other hand, focus on aspects like cash flow, profitability, balance sheets, overall valuation, and acquisition price.
The Importance of Brand Value
There is a difference between a business and a brand; while every business has stand-alone value through assets, personnel, and relationships, brand-centric businesses heavily invest in brand authority, significantly contributing to their market value. This affects negotiations, as buyers and investors must account for the "brand" in a company's financial and competitive position.
During the M&A valuation process, evaluating the current and forecast financials of the selected business includes assessing the brand’s value before structuring the deal. While the brand represents one of a company's largest assets, its financial value often goes unrecognized compared to tangible assets like equipment or property, which are clearly quantified on the balance sheet.
Brand value plays a significant role in market competition, influencing consumer preferences through brand recognition and loyalty. For sellers, a higher perceived brand value enhances your negotiating position, while for buyers, it can lead to more favorable outcomes from the acquisition.
M&A Challenges: The Moribund Effect
An important consideration during an M&A transaction is the impact of "The Moribund Effect," a concept introduced by Roger Sinclair and Kevin Lane Keller.
According to their research paper "Brand value, accounting standards, and mergers and acquisitions: “The Moribund Effect””, once a brand’s value is recorded on a balance sheet during a merger or acquisition, it becomes a fixed intangible asset, unaffected by future brand enhancements or marketing efforts. As a result, the recorded brand value can no longer be adjusted, regardless of brand performance post-acquisition.
To mitigate this, Sinclair and Keller suggest that companies include brand performance commentary and updates in the Management Discussion and Analysis section of annual reports. This approach enables investors and buyers to track the brand’s performance beyond the static balance sheet value, providing an accurate picture of the brand value during future M&A negotiations.
Financial Valuation of Brands
As the economy continually shifts towards technology-driven models, intangible assets including intellectual property, technology patents, and brand or reputation hold greater value than physical assets. According to a 2020 study on intangible asset market value, companies now derive a significant portion of their enterprise value from these intangible assets.
However, quantifying the financial value of brand value remains challenging for many. The Marketing Accountability Standards Board encourages Chief Marketing Officers (CMOs) and marketing departments to regularly report on the Financial Value of Brands (FVB) to the executive level. For brand-centric businesses, these insights are critical, as investors and buyers increasingly prioritize brand value and customer loyalty.
Conclusion
It is important to understand the difference between a company and a brand; some businesses are more brand-centric than others. While some companies may invest millions in building brand recognition, others may focus primarily on operational and financial aspects. However, the importance of investing in building brand authority, and translating that into financial benefit to the overall enterprise value in annual reports, cannot be overstated. This is especially true if the company has future plans to sell the brand or if the brand is new.
If you are looking for ways to measure or increase your brand value, contact PENEDIT Marketing here.
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