“What is the value of our company’s reputation?” – Con’t

Many of you are aware of our quest at CFO.University to help you answer this question from your Board, “What is the value of our company’s reputation?”

I took that question to a leader in the M&A advisory field.

This expert’s perspective comes from performing and reviewing the valuation of many businesses during his career. He made five excellent points about reputation that will help us grow our knowledge base on the subject.

First, he noted that brand survey tools (see our initial article The Value of Our Reputation) have been around for ages and are frequently used to determine market reach and penetration when preparing due diligence for large transactions. Interestingly enough, he rarely sees them used to help determine valuations on small and middle market companies. There seems to be an opportunity for sellers to improve their valuation by being able to objectively articulate the value of their reputation.

Second, he reinforced the concept that book value has no relation to market value. We all understand that intellectually, but in the heat of negotiations the book value card always seems to come into play. Whether it’s on a few smaller assets being included in the deal, calculating the value of working capital or as a psychological trick to move the opposition’s mindset.

Third, he made in interesting observation I hadn’t considered. Reputation in relation to valuation can only occur when there is a revenue stream. Said another way, “It’s impossible to connect reputation value without revenue.” This insight disconnects two types of reputation. The reputation of the company and the reputation of the management team. A management team may be able to attract capital due to their previous success and an interesting business model, but until they can generate revenue (product or service acceptance by customers) there is no market value to be attached to the company’s reputation.

Fourth, he pointed out a reputation that drives recurring revenue creates more value the longer the company can maintain it. Plus, a reputation that grows customers or grows the revenue per customer over time has the same impact. A good reputation is like adding to an annuity, the longer the maturity and with more “good” being added each year the greater the value will be.

Fifth, he identified that reputation has many different facets; demographic, psychographic, political, ethnic, social, etc.. You may have a good and bad reputation at the same time. Success is dependent upon having a good reputation with customers who might use you product, while failure would result if the reverse were true. Here he used Ben and Jerry’s Ice Cream as an example. Ben and Jerry’s uses a complex psychographic of their target customer to identify where to establish their stores; focusing on areas with trendsetters who had active lifestyles and were concerned about sustainability. As in indication of how well they have done this, our expert steadfastly defended Ben and Jerry’s when I kiddingly compared them to H?agen-Dazs. I felt fortunate we were talking over the phone, not in the same room. That is the value of reputation.

So, with the help of an investment banker we took a few more steps in the “reputation value” learning process.

• Sellers who can objectively articulate the value of their reputation may extract more value from a buyer. (Can this same principle apply to customers of our products?)
• Book Value may have “psychological” value but should never be confused with market value.
• A company’s reputation has a starting point. The first sale.
• A good reputation creates an annuity whose value depends on growth and term.
• Our company can have many reputations. The ones that count are those held by our potential stakeholders.
• Ben and Jerry’s is darn good ice cream.

I am anxious to hear how you would respond to your Board if they asked you, “What is the value of our company’s reputation?” Thank you to those who have weighed in on the question already.

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