One of the things I loved most about my coffee business was its brand. Right out of the gate it summed up everything Chris and I wanted the business to be about. It was energetic, playful and unique. Caffinity was even fun to say, although the brand was about much more than a name. It was about an experience so good that people not only paid a premium, they would go out of their way to make it part of their daily routine.
It didn’t take long for the Caffinity brand to reach “recognizable” status around town. Even years later people remember the brand, and it makes them smile. When you sell your business there is always some amount of sadness and loss involved, no matter how ready you are to move on. When Chris and I sold Caffinity, I knew that owning the brand would be the thing I missed the most.
Can I tell you exactly how much the Caffinity brand was worth? No, I don’t think I can. Did the strength of the brand help us sell the business? You bet it did.
Big brands. Big numbers.
While drawing parallels between public companies and small business tends to be a fruitless exercise in most cases, it’s interesting to see what some of the most well-known brands 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 businesses of all sizes. There are few surprises at the top of the list, although the dollar amounts are breathtaking nonetheless. The Apple brand alone is valued at $104 billion, almost double what the number-two brand, Microsoft, is worth. Additional research shows that strong brands with good reputations have 31 percent better total returns to shareholders, and brands account for about a third of the value of Fortune 500 companies.
As business owners we put a lot of thought, effort and dollars into building our brands over the years. While the short-term benefits should be seen in the top line sales of your company, a strong brand can also contribute to transferrable value when it comes time to sell. Here’s how:
1. Strong brands reduce risk.
The longer I work with business sellers and buyers, the more firmly I believe that the process is largely about transferring 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 buyer, and they will work hard during due diligence to uncover all of them.
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 would continue to thrive under new ownership. If you’ve created a brand that customers know, love and flock to then you’ve reduced the risk associated with owning your business.
2. A strong brand can increase your multiple.
Part of the art and science of business valuation is determining what multiple to apply to pre-tax earnings to come up with a probable purchase price. The multiple is based largely on two things: the industry of the business, and risk. 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 range. You’ll have a better chance of doing that with a solid, well-known brand in place, reassuring buyers that there is little risk of your business languishing in obscurity after they own it.
3. Strong brands attract people, including buyers.
One of the things I enjoy most is telling the story of a client’s business through the Confidential Business Overview (CBO) that we send to qualified buyers. My job becomes much easier when I’m telling the story of a business that has built a great brand. If buyers have heard of your brand, there’s an instant desire to know more about the opportunity to own it. If they haven’t — perhaps because they’re from out of state — the story behind a great brand peaks their interest, and makes them want to learn more.
To be clear, a strong brand won’t make up for poor financial performance in a buyer’s mind. But the brand you’ve built will always play a key role in both the sellability and overall value of your business.
Are you building a brand that someone would love to own?
Author: Barbara Taylor
Barbara is co-founder of Allan Taylor & Co. and a former New York Times blogger. She has been a small-business owner since 2003. Barbara lives with her husband, Chris, and their two sons in Northwest Arkansas.