Placing a dollar value on a company’s brand is nearly impossible. But when preparing your business for sale – or for buyers looking to make acquisitions –brand becomes a valuable asset. Putting effort and time into developing your organizations’ brand can be a strategic play in getting the most out of the sale.
Managing Director of Keystone Capital Markets, Allan Siposs, has over 25 years of experience advising business owners on financing, business valuation, and preparing and selling businesses. In this episode of Expert Opinion, he discusses each of these topics, and how brand plays a significant role.
How brand plays into the value of a company 1:45
The sooner you prepare your brand strategy, the better 4:12
Brand architecture and platform company purchases 7:14
Placing a value on intangible assets 13:10
Who should own the brand? 19:08
Welcome to Expert Opinion, the BrandingBusiness forum where leaders share their views, insights, and experiences from the world of B2B branding. And now here’s your host.
Ryan Rieches: Hello, this is Ryan Rieches and today’s show is titled How to Look at Brand Strategy When Preparing a Business For Sale. We have a great guest, Allan Siposs, managing director of Keystone Capital Markets. They’re a highly focused investment bank that provides sophisticated M&A and financial advisory services to middle market businesses. Allan has over 25 years of experience advising business owners on financing, business valuation, preparing and selling their business with the greatest possible returns. So, I’ve known Allan for over 10 years and always really appreciate his perspective as it relates to the role brand and brand strategy plays in business success and appealing to strategic buyers. So if you’d like to learn the best practices on those topics, I’m sure you’ll find some interesting insights from Allan. So let’s get onto things here. Allan, thanks for being a guest on Expert Opinion.
Allan Siposs: My pleasure, Ryan. Happy to be with you.
Ryan Rieches: Well, let me start off with the one right down the middle here. I know it’s very difficult to put a dollar value on a brand. There’s been a lot of studies that are trying to do so, but from your perspective as you’re evaluating a business and considering the multiple, the valuation of it, how do you think about brand as it relates to and when you’re advising a business owner on how to sell their business someday?
Allan Siposs: You know, great question, Ryan. And it’s really the core of a lot of what we do with our clients is understanding what drives value and what would be interesting and unique from a buyer’s perspective and brand often plays a major role in that. You know, buyers are typically looking at three alternatives when they are buying a company. They can buy the subject company, number one. Number two, they can buy another company, a competitor, if you will. And number three, they can begin a company, start a company on its own from the ground up if you will and the more that option two and option three that is buying another company or starting from the ground up are unattractive because of the uniqueness that the subject company has, the more that happens, the more valuable that business is going to be.
Allan Siposs: And so brand can play a really important role in that in differentiating the business from competition, adding value, perception of value in the marketplace. And really at the end of the day, a buyer is buying the level and certainty of future cash flows. And so the more the brand differentiates the business, the more it creates this protective moat around the business, the more valuable the company is going to be because the certainty of those future cash flows will be higher and more protected.
Allan Siposs: So brand can play a really important element. Now that’s the easy part. The harder part is determining how much value it truly adds and that’s going to be somewhat in the eye of the beholder. For some buyers, they will see brand as very important and a key focus of what they use to value a given target. Others may feel that the brand will need to be refreshed or repositioned down the road after they buy the business and they’re less focused on current brand and thinking about where the brand can be developed and that will influence their thinking. But at the end of the day, what’s really important to understand is brand is going to be a key determinant of value. It’s going to help to differentiate the company in the eyes of customers, clients, and of course, buyers, when the time comes and paying attention to that from an M&A or mergers and acquisitions perspective becomes very, very important.
Ryan Rieches: Well, I think that’s a fantastic and succinct summary. So considering that there is additional value in a brand that’s well-defined, has a competitive advantage for all the reasons that you just described, how early should an executive, an owner and CEO, think about their brand when they’re preparing the company for a potential sale?
Allan Siposs: Well, we’d like to say in our business that time is your friend. The sooner you begin preparing, the better. So we joke that you should begin thinking about a sale the moment you buy the business or the moment you start the business because eventually you’ll exit from the business in one form or another. Hopefully walking out the door with your head held high and a nice payday and moving onto the next chapter of your life. And hopefully it’s not under duress or stress. So really the sooner the better, it’s extremely important to think about all aspects of value in particular brand and how it’s going to play into value. And as you, I’m sure well know, Ryan, the development of a brand, the implementation of a branding strategy takes time. And if you’re rushed through that process, unfortunately, you often don’t get the best results. So the sooner they start, the better and the more attention they pay to it from the outset, the better.
Ryan Rieches: Yeah, completely makes sense. And it absolutely does take time, not only to develop the brand and change people’s perceptions ultimately. And you have both the internal branding and the external. So the external, of course, is important to appeal to a buyer, but also the internal branding, getting the team aligned around a vision for the future and how to position the brand so it’s unique and then ultimately making a brand promise, but then ultimately the internal team has to keep that promise too. So when you, as you’re advising companies, do you also think about that in the area of internal branding and getting the team aligned?
Allan Siposs: Absolutely. I was just going to say, you know, the brand becomes enmeshed with the culture and the value proposition of the company. And you know, there are examples of companies that have a public facing brand that is not internally accepted by the staff and then that becomes a disconnect. And it’s so important that all of the employees of the company are really on board with what the branding means to the customer, the outside world as well as within the organization. All of that becomes very, very important to making it a cohesive message and the message that the ultimate customer really accepts then embraces. Very important.
Ryan Rieches: Well, switching topics a little bit. One of the areas that we’ve been, a trend that we’ve seen, is working with private equity firms who do roll-up strategies, where they’ll look at a certain industry and they’ll buy one company and then two, three, four, five, 10 companies kind of in the same area. And then initially, just keep the brands independent of, and then ultimately it comes a point where it’s time to roll them up into a brand strategy going forward, whether that’s one brand and a one dominant brand and maybe there’s five brands, but one dominant brand or maybe one brand per channel or something like that. So that’s an area that we get involved with quite a bit as well, and is what we call brand architecture and developing a long-term roll-up strategy. So is that something that you guys get involved with as well?
Allan Siposs: Absolutely. That the strategy of a private equity group of buying an initial company, what’s usually called a platform company, and then adding add-ons or new companies to that platform is a well-worn and time-proven strategy. Most private equity groups will buy companies with the objective of building value and selling the business in five years or less. There are exceptions, but typically it’ll be five years or less. And back to what I said earlier, value is going to be driven by the level and certainty of future cash flows. So the private equity group comes in and buys the business. They shed excess costs. They streamline operations. Maybe they improve their supply chain management and make a few other things, adjustments that help to improve cash flows. And lo and behold, suddenly you have a company that’s cash flowing in a higher level.
Allan Siposs: So if the private equity group is focused on increasing the level of future cash flows by focusing on the brand in parallel with that value can be increased as you get to the certainty of future cash flows. In other words, you can do all the things that I just mentioned and the cash flow will increase, but alongside that, if the brand is being built and you’re creating this differentiation I mentioned earlier, that’s going to help to keep competitors out and better position the availability of that cash going forward. Thus value goes up.
Allan Siposs: Again back to the fundamentals of the level of future cash flow and the certainty that those future cash flows will be achieved. That will ultimately be core to whatever a private equity group does. That’s the beginning of the story and then as they begin to add in new portfolio companies to the platform, they’re going to be looking at each of those companies with a mind to how can we leverage the brand that we’ve developed within the core business to get into new vertical markets or maybe new geographic markets or different products, different end users, all taking advantage of this core brand and in some instances they will look at the branding that the target company has done and do just the reverse. Gosh, how can this brand allow us to put our products through the acquired companies channel?
Allan Siposs: We had a transaction a few years ago that involved a company in the pet food space and the company was very active on social media. They had a very strong Facebook presence with lots of followers and really strong customer engagement through Facebook. The acquiring company did not have a good social media presence and they saw the target as an opportunity to not only gain a new product line in a desired niche of the pet food space, but also an opportunity to leverage its social media into the other brands that it developed. And so, after the acquisition, that core brand was leveraged into the Facebook presence that the target had and used that as a way to get new customers aware of its product. It worked beautifully and again resulted in higher cash flows and more protection of the brand.
Ryan Rieches: Well, you mentioned private equity, you mentioned strategic buyers, and then there’s also financial buyers who are buying an asset just for the financial benefit. And I’m just thinking out loud here as a company thinks about their future and looking at where they can maximize their return, I’m sure that the strategic buyer as well as private equity and the role of strategies is better than the financial. In other words, a financial might just buy an undervalued asset because they have something there, but they haven’t done a very good job in branding or leveraging it and there is a lot of hidden value. So I would imagine that as you’re advising customers or clients who were thinking about their business and their brand and for a future sale, two, three, four years out, thinking about how they can position the company, develop that brand, develop that compelling value proposition, the competitive differentiation can actually add value to the business, right, and how to think about that in order to prepare and even identify potential buyers. You could almost position a company a in that manner as well. Is that correct?
Allan Siposs: Yeah. You know, you mentioned financial buyers versus private equity. We have seen a lot of activity within private equity groups and the values that they’re offering on businesses that suggests that in many cases they’re operating very much like strategic buyers. So they’re looking at businesses with a mind towards how can they add value and position the business to ultimately be acquired by a strategic buyer. And the result is that in the marketplace, the valuation, the private equity groups are paying are often at or even slightly above the strategic value that buyers are coming to the table with.
Allan Siposs: So the split in the marketplace that we have seen historically between strategic versus equity is less pronounced. So there still can be a difference, but it’s less pronounced. When you can attract a private equity group with a purely financial buyer, one that’s only acquiring a company for the financial metrics, as you point out, there usually is a fairly significant difference because the purely financial buyer is not looking at some of the intangibles that you mentioned like brand and then other elements, but thinking, “Gosh, where can I cut costs? Where are their underutilized assets, et cetera.” So, there can be different levels of value attributed to the same company based on the lens through which each of these buyers are looking at it.
Ryan Rieches: Yeah, makes complete sense. So I remember a recent report stating that 84% of the average S&P 500 business value is based upon its intangible assets and just 40 years ago that number was 17%. So clearly the intangible assets beyond physical have a greater value in today’s world and as you just mentioned, brand is kind of related to the company’s future ability to perform and so brand is part of that intangible asset, but also intellectual property and there are a number of different things that are associated with intangibles. How do you guys look at intangibles as you’re putting a valuation on a company?
Allan Siposs: Sure. The rubber meets the road when the deal gets done and you see what final valuation is, right? That’s where a buyer has stepped up to the table and monetized its perception of what intangible value is. It’s often very difficult to isolate intangible value for some of the items that you mentioned such as brand and IP and so forth. We’ve seen situations where production capabilities or a technology or a market positioning will differentiate a given company from the competition and lead to a higher valuation as a result. So it just really depends on the specific situations at hand. Where there are very high values attributable to a technology or IP, oftentimes, you can value that based on a discounted cash flow model or a similar approach to try to estimate what the future cash flow will be associated with that element, but it can be very, very difficult.
Allan Siposs: And as I said a moment ago, ultimately it’s going to be what a willing buyer will pay a willing seller that’ll indicate what the value of those intangibles are and it can be all over the board depending on who the buyer is and how things had been positioned.
Allan Siposs: A real quick story. A few years back, we sold a manufacturing business that was in the aerospace sector and the seller had received an unsolicited offer from a buyer and it was a very attractive offer. They thought, “Gosh, let’s just take this and go to the closing.” And thankfully their attorney recommended that they interview some investment bankers. They interviewed us and hired us and we represented the company. We went out to the marketplace, spoke to a number of different buyers. Initially got indications of value that were slightly above what the initial unsolicited offer came back at.
Allan Siposs: And then we went through our process and got offers that were quite a bit higher and ultimately the buyer that put the first offer on the table, and I’ll just put some numbers around that so you get a sense for context. Initial offer was $150 million. When we ran our process, we were getting offers in the low 200s. Ultimately that first buyer that was at the table at 150 came back and we sold the company to them for $305 million.
Ryan Rieches: Wow.
Allan Siposs: So there’s quite a premium associated with the intangible value that one buyer saw, but it was not until they had the competition of other buyers at the table that they really stepped up and sharpened their pencil. So sometimes it takes a little coaxing. You get buyers to actually pay for intangible value, but it’s always there.
Ryan Rieches: Yeah, great example and an example of the benefit of your process as well. So well done.
Allan Siposs: Yep.
Ryan Rieches: So another topic here, when we build brands, we always use research to guide decisions, recommendations, not only from our point of view, but also to give comfort to the executives as to they’re making the right decision. So we go out to the marketplace, talk to customers, prospective customers, if we can reach them, and we use a lot of that to really understand how the brand or company is perceived and then how to position in the future. Some of that research has also been very valuable when preparing a business for sale because it gives data and insight to a prospective buyer as to the end validation of either the offering and/or the future potential. Do you have any experience like that as well?
Allan Siposs: Yeah, yeah. I really do. The key tenant of any business is to make the customer happy and in order to effectively serve the customer, understand their needs, wants, and concerns. It’s just vital to really be engaged and understand what they’re looking for. And this can be accomplished through a number of means, including the research and engagement you’re talking about, but the more the businesses engaged with the customer and the greater its understanding of what the customer wants, the more sticky that relationship will be. And I’m back to the same old thing again. The more certain those future cash flows and thus the higher the value of that relationship. Absolutely. Very important stuff.
Ryan Rieches: All right, cool. So another area that is a hot topic and that is around culture, but also what we call guiding statements of purpose, vision, and mission. And you know, purpose is why we exist, vision is what we aim to achieve, and mission is to how we’re going to achieve it. So the benefit of these are primarily internally to align, inspire internal teams, but we’ve also found that it gives some investors clarity of direction and everything is really well-defined. So the executive team is very clear on what they’re trying to accomplish. Things can be measured and you can understand how far you’re along on that path. Give me your perspective of that approach.
Allan Siposs: Yeah. I think, you know, having a clear internal culture that communicates the values and the mandate of the company is extremely important. And the more defined that is, back to what you said, the more defined that is and clear that is, the more I think values have comfort in what the company’s current engagement is and current strategy is in the marketplace. So that will help get clarity around how that fits in within their strategy, if it’s a strategic buyer or how it might serve as a platform or tuck-in if it’s a private equity buyer. So getting a clear sense for that, communicating it within the organization in a way that engages employees and other constituents within the organization. Very, very important. All of that becomes part of the intangible that makes a company A, with that more valuable than company B, without it. It becomes very important. So I agree with you.
Ryan Rieches: All right, cool. Hey, we’re almost out of time so you just got a couple of final questions here. Who should own the brand, the CEO, the lead marketing person, sales, someone else? Who, in your perspective, should own the brand?
Allan Siposs: In my opinion, ultimate responsibility for the brand lies with the CEO. However, typically there are a number of key people within the organization that influence and may take ownership of the brand including the COO and you know other marketing officers. At the end of the day, every employee of the company should have an interest in the development and protection of the brand. And back to what you were asking a moment ago about culture and how the organization communicates that internally, I think that becomes extremely important, but my opinion is CEO is the owner of the brand and the director and ultimately the person who should be the direction or create the direction for the brand and own it.
Ryan Rieches: Yeah, completely agree. They have to take ownership and also agree with your topic or your comment about everyone in the company needs to be able to deliver that brand promise. So that’s why the clarity of communicating what the brand promise is, the purpose, vision, mission, allows everybody the guidance and it doesn’t require a lot of oversight to be able to deliver it. So completely agree with that. We’re almost out of time. Any final thoughts, trends, important topics that relates to brand strategy and positioning and preparing a company for sale?
Allan Siposs: Well, what I would add in closing is, you know, the path of branding or refreshing a brand is extremely important and a seller is going to latch onto that and attribute value to it. And there are numerous examples of products that have been rebranded in haste or less than optimal. And you know, unfortunately the outcome can sometimes hurt the brand rather than the original brand that was in place. So, you know, I think in all instances, it’s really important for the company to have really good advisors on the branding side to have a clear strategy for what they want to accomplish and to allow themselves enough time to implement that brand so that it has the greatest opportunity to not only improve the core business and its operations, but also from my perspective, to help improve the value of the company when it goes to market. So really important that you have time, a good runway, good advisors, good clarity of what you want to do and treat branding seriously. It’s not an afterthought, it is core to the value.
Ryan Rieches: Great summary, Allan. Really appreciate your time today and being a guest on Expert Opinion.
Allan Siposs: My pleasure, Ryan. Thank you so much for asking me to join you.
Ryan Rieches: Well, that concludes our show today. So if you have interest in other topics, please visit brandingbusiness.com, we have many podcasts for you to listen to.