Selling Brand Value
“When you sell your business, will you be able to reflect the value of its brand in your selling price?”
Cost vs Value
Holden vs Ford? Fans of the rival car makers will loudly argue the merits of red or blue; talk knowledgeably about the latest models; pay a premium for branded shirts or stubby holders. There is no question that these brands have value, beyond the cars themselves.
Does a Brand have Value?
A brand has value to a business when it has a positive impact on consumer attitudes and behaviours, beyond their experience of the business. For instance, people may endow a brand with qualities of reliability, value for money or service excellence. They may be willing to pay more at your restaurant than for an equivalent meal across the road because of the brand. They will eat at the restaurant, tweet pictures of their latest meal, buy the merchandise and rave to their friends and family. When you sell your business, will you be able to reflect the value of its brand in your selling price?
A brand is usually classed within goodwill in the sale of a business. Goodwill is the amount a purchaser pays above the tangible assets, like equipment and inventory. Goodwill is an intangible asset because you can’t point to it and say there it is, like you would a chair. The cost of a brand is not a true indicator of value. A good brand is worth more than the cost of designing and registering a logo; printing the napkins or building a website. On the flip side, you could spend a lot of money on your brand but find it is worthless when you go to sell. The brand asset rarely appears in the balance sheet of a business. Our accounting rules don’t allow us to show the value of internally-generated intangible assets in the balance sheet because they aren’t an identifiable resource that can be measured reliably at cost.
Valuation Methods
A brand has value to potential business purchasers if they will benefit from increased sales or expense savings , as opposed to a non-branded business. You might consider the following valuation methods:
- Price premium and volume premium – the extra sales from price or volume, compared to an unbranded business.
- Profit premium – the extra profit, compared to an unbranded product.
- Incremental cash flows – the extra cash flows of the business resulting from the brand.
- Market comparison – compare recent business sales as shown in Bizstats data.
Brand value exists when you have scale. Very few stand-alone hospitality businesses would be able to show a brand value. Often the goodwill of a stand-alone hospitality business comes from its location, key people (such as an executive chef), or its processes and systems, rather than its brand. Brand value exists when you have scale, such as multiple locations operating under the same brand umbrella or a franchise operation.
Your brand may have a value to your business right now, but it rarely translates into a higher price when you sell your business unless you can prove that the brand allows the business to earn a premium. If you want to realise a brand’s value when you sell, then your brand needs a lot of ardent fans, like Ford and Holden.
This article was first published in the Restaurant Association New Zealand enews, 14 April 2017.
