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Brand Value in a Turnaround

Brand-value-in-a-turnaroundBrands have power. In the NBA, the stars get the calls. Old Masters are worth more. Fees on the speaking circuit depend on who you were, not how well you speak. Harvard University has a huge list of applicants for only a few seats. The same is true in business. Brand value in a turnaround can be a major part of the company’s value.

Your Marketing professor told you that the market leader – the firm with “brand equity” – can charge 10% more than the competition with no loss in customers. The power of the brand is a 10% markup. 10% of revenue can represent half to all of the company’s profits! Yes, brands have power. The brand is a valuable asset.

Companies faced with dwindling cash flow always take inventory of their assets. They use this to figure the value of loan collateral, or to assess a selling price for the company or a division. One of these assets is the brand.

What is a Brand Worth?

There is no formula for calculating the brand value in a turnaround. The true test is the amount a buyer will pay for it. Buyers calculate that value using either or both of these methods:

  • The purchase price the seller will accept for a division or company including the brand, minus the appraised value of the non-brand assets. The remainder is booked as “goodwill,” and the largest part of that is the value of the brand.
  • The cash flow potential of the business if the buyer was operating it, minus the appraised value of the non-brand assets and the value of synergies with the buyer’s operations. Again, the remainder is mostly the value of the brand.

Two examples show how much this value can be. In 2013, when Flowers Foods bought the Hostess bread brands at auction for $350M, they booked 55% of this ($193M) as goodwill. In 2009 Stella D’oro sold itself to Lance Inc. for $24M. Nearly 75% of this amount was booked as goodwill. See  “What’s In a Name? Just Ask Hostess Brands – The Value of Branding in Bankruptcy,” by Kevin Lavin, ABF Journal, Jan/Feb 2014.

How Does a Brand Survive?Brand-value-in-a-turnaround hostess

Hostess and Stella D’oro were sold when union demands made owning them less profitable than selling them to another firm whose existing production or distribution made those union jobs unnecessary. As a result, the brand could then be operated profitably. In the process “valuable brand assets trapped within broken enterprises [were] disentangled, monetized, and revitalized for the benefit of many, including creditors.”

The above model can be called sale of assets. A second model is reorganization through bankruptcy. Think about airlines and GM and Chrysler. The last decade has shown any number of known brands that experienced bankruptcy and reorganization without interruption in their operations. The brand survived while ownership and debt were restructured.

A third model is described in the cited article, using Sharper Image and London Fog:

“In 2011 the Sharper Image brands and intellectual property were sold…[at auction]…to Iconix Brand Group, which now licenses the brand to third parties and operates the Sharper Image website. Iconix has developed an entire business model around acquiring and resurrecting faded brands, such as the 2006 purchase of London Fog via a sale in bankruptcy. Iconix assumes no inventory or manufacturing risks; it provides marketing support for its brands and licenses them in exchange for royalty payments. Many of these brands have newfound popularity in foreign markets, especially Asia.”

How to Capture Brand Value in a Turnaround?Brand-value-in-a-turnaround glass

All companies should recognize that if they invest to associate the product brand with a clear and positive message in the minds of consumers, the brand will have a life separate from the company who makes or sells the brand. The brand will have a life of its own in the minds of customers. Investing in a brand is not just marketing to make current sales. Like any other investment, investing in a brand builds the value of an asset.

Healthy companies should invest in and protect their brands. Companies with cash flow issues should assess their brand value in a turnaround, and include that value in collateral for financing.

Companies considering sale or reorganization through bankruptcy should assess their brand value in a turnaround to decide what to sell or how to reorganize. For example, Hostess realized that its union-encrusted operations were a drag on profits and enterprise value, but the rest of the company (brands, recipes, marketing) had tremendous lasting value for customers and thus for buyers. So it sold the brands, and closed those operations that could not be sold. Proceeds from the auction process were 80% higher than previous valuations of the company as a whole!

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About the Author

About the Author: “Profit Spotter” Tom Gray helps business owners spot and capture opportunities to grow profits, and guides those considering a sale. He is a management consultant certified as a Turnaround Professional (CTP), Business Development Advisor, and SCORE Mentor. Reach Tom at 630-267-7193 or tgray@tom-gray.com See www.tom-gray.com. For Tom’s two books and ten booklets, see www.businesstechniquesbooks.com. .

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