Wickersham – PE and the new best practice for value creation

The Benefits Are Not In Question

Demonstrating quantitative proof of the financial value of building brand equity and goodwill has been a perennial challenge for CFOs, and the bane of C-Suites and CMO’s. How do you measure love, feelings, loyalty, advocacy, or intent? Yet the benefits of strong intangible brand equity have never been in question. There are decades of empirical data supporting the wide-ranging positive impact of a strong brand, for both B2B and B2C. These benefits directly and significantly contribute to value creation, goodwill, market performance, and return on investment.

This summation from the Corporate Finance Institute is a decent framing of why companies focus on building brand equity and goodwill to increase shareholder value:

“Goodwill is defined as an intangible asset — like a strong brand identity and positioning or superior customer retention and loyalty — this provides a company with a significant competitive advantage in the marketplace and is an indicator of future success while reducing risk.”

In the capital markets, these numbers are easier to measure but they are measured only in annualized studies with publicly traded companies. They do, however, serve well to demonstrate the significant value of intangible brand attributes.

When it’s time to exit, intangible brand equity and goodwill play directly and powerfully to a buyer’s evaluation of an acquisition having a powerful impact on purchase influence. An acquirer’s decision path is always based on the promise of future performance and the associated risk profile, all of which are greatly impacted by intangible brand equity and goodwill. The result is extreme sellability, strong negotiating leverage, and higher transaction multiples and ROI.

The Problem To Be Solved

The Marketing Accountability Standards Board was established in 2007 to attempt to create unified standards to measure brand value and return on brand-building efforts for non-publicly traded companies. As of 2019, The Board’s findings are deeply convoluted and cumbersome, and there seems to be no consensus.

There are accounting methodologies for assigning financial values on the balance sheet for some intangible equity like IP, patents, data, and (using complex formulas) goodwill are also woefully incomplete in evaluating intangibles. These methods to determine equity value are ineffectual because they are done after the need to assess and optimize brand to improve performance and grow value has passed, usually when a valuation is needed or at transaction.

For those whose role is to improve performance and investment outcomes, these methods are wholly inadequate. They do not index strengths and weakness, nor present opportunity for remedy. Nor do they assess the full scope of intangible equity attributes of brand that are integral to driving value creation and delivering the benefits listed above. And further, they do not assess brand alignment with market opportunity, a critical step in determining strategies for improvement.

Simply, there has been no methodology or tool available to business that is a tactical, real-time solution to assess, optimize, grow, and monitor brand equity in real-time. And this is what the investment community needs — the ability to quickly and efficiently assess brand equity strength and identify where immediate impact on performance and value can be made. After all, this is the goal.

An Overdue Solution

The full breadth of benefits from a strong, well-aligned brand together drive significant and tangible financial return, and for private equity, that value is realized in better performance, increased leverage, larger multiples, and greater transaction returns. This is a rising tide in private equity. If we can assess and score brand attributes, we can optimize them and leverage the benefits. And leverage benefits are clear across the enterprise, in the market, and in investment outcomes.

For private equity (and all operating companies, for that matter) there is now a simple and actionable way to objectively assess and optimize intangible brand equity on-demand, in real-time. We have spent the last year developing the BRANDThink IndexTM, an assessment and scoring methodology that quantifies, indexes, and scores a rigorous range of brand equity attributes and their alignment across core constituents. These scores are evaluated and scored against the current market dynamics, as

well as stakeholder objectives. It’s fast, efficient, cost-effective and most importantly, immediately actionable in identifying opportunity for remedy. It is the only brand equity scoring index and methodology of its kind. It assesses brand equity strengths and weaknesses with a cognizance of the investment/exit objectives. There are three BRANDThink Indices, one for brand strength assessments of existing holdings, one for pre-diligence and/or due diligence for a merger, and for pre-diligence and/or due diligence an acquisition.

The New Best Practice for Maximum Value Creation

All private equity firms today focus on financial engineering and operational improvements in their value creation strategies. And it has served the industry well over the years. With increased competition for good investments, lower margins, reduced fees, and a need to deliver more value to both their holdings and shareholders, there is a need to accelerate value creation, and for a third best practice – Brand Equity Optimization. Together with finance and operations, investments will realize their maximum potential return to shareholders by adding this key pillar seamlessly to any high-demand value creation strategy.

The BRANDThink Indices assess and score brand equity attributes and identify opportunities for optimization across the three key strategic pillars found in all high-value brands: Constituent Alignment, Equity Attribute Strength, and Market Opportunity Alignment. Attributes are assessed for strength and weakness, and their alignment across a company’s core constituents. They are then scored against current market dynamics and opportunity. The indices provide granular as well as aggregate Master Scores indicating overall brand strength and alignment across constituents and with the market. Findings are then distilled to relevant, actionable strategies and tactics that can directly and imminently contribute to value.

It is way overdue. Leveraging the power of brand and its intangibles is the new best practice for maximizing value creation and firms looking to outperform the completion are embracing the power of building strong brands. When leveraged in concert, these three best practices for value creation are the key to driving outsized investment returns.

Rant, pontificate, agree or disagree, but please do opine. Love to hear your thoughts. If you found the read valuable, we’d be grateful for a share and a like.

This article was originally published by BRANDThink, LLC, purveyors of a uniquely capitalistic approach to brand strategy. Read more at https://www.brandthink.biz

About Lysle C. Wickersham: Leveraging a 30 career in advertising/branding and investment banking, Lysle co-founded BRANDThink, LLC, a consulting firm supporting private equity in their value creation strategies to improve investment outcomes.