Who Owns the Brand Equity: The Reps or the Enterprise?

In Commercial Due Diligence, it’s often the assumption that customer relationships are an “asset” of the business, but that’s not always the case. The reality is that for many businesses, the quality and stability of customer relationships are owned by account representatives (and possibly only a few reps) – who walk out the door with those assets every night, and who (for the right price) will move them to competitors and take those assets with them.

Exploring whether more customer loyalty lies with the business (i.e., is institutionalized) or lies with individuals/account reps who are managing customer relationships is extremely important to companies that are in markets where strong account management and servicing is an important Driver of Choice. Are key factors that sustain performance trained and engrained in the business systems, or dependent on specific individuals?

The risk of Brand Equity living with specific individuals rather than with the company is that if a key account rep leaves to join a competitor, accounts could follow them. Then, you are not only looking at an HR issue of how to replace high performers, but also two distinct finance problems: 1) the economic pressure of paying more and more to keep key reps; and 2) how to replace the revenue from the lost account(s).

There is one obvious way to test for concentration risk in sales reps: ask for the rep compensation/commission schedule and/or a revenue by salesperson report. But many companies have natural variation and concentration driven by random factors that have nothing to do with account ownership – and telling a Management team that you don’t think they have control over their own customer accounts is a big accusation. So, how do you learn with confidence whether the company more so owns its customer relationships?

In a diligence window, there are a few ways to evaluate where the Brand Equity lies (i.e., the ratio of Enterprise versus Personal Brand Equity), and your risk of account churn:

1. Ask customers about their past experiences moving from one provider to another. What motivated the switch? If the reasoning is about specific individuals, it is an obvious red flag
2. Examine the competitive landscape – if this has happened to a competitor, it’s probably also a risk for the target company
3. Ask customers to describe individual sales and individual service personnel. Then ask everyone – Management, customers, current and former employees about the target company’s culture – if the cultural strengths align with the descriptions of individual salespersons, then that’s a good sign there is institutionalization
4. Ask customers how they interact with the company. The more you hear about systems rather than people, the lesser the risk (though, also the lesser the value gen opportunity as the institutionalization of brand equity over time should be an important component of the value gen plan)
5. Ask customers who they interact with at the company. The more you hear specific individuals’ names as opposed to multiple individuals or the firm name, the higher the risk

Finally, look for areas where you can drive performance that is not driven off relationships. Ask customers about considerations for a provider that go outside the quality of the relationship – things like logistics, product performance, pricing, etc. – where are the levers that point that the company could lean into in addition to great account management to create stronger customer attachment to the company?

There’s a significant difference between a company that is dependent on specific employees showing up day in and day out versus being able to put a wider spectrum of employees in the same sales and support processes and have similar outcomes. In situations where the Brand Equity lies with individuals rather than with the target company:

1. The structure of the deal may be different to account for compensation levels and the right defense mechanisms to retain the target company’s employees; and
2. The size of the value gen opportunity can be disproportionally greater (as there are valuable opportunities to systemize – e.g., lower customer acquisition costs, lower service costs, increase stickiness and lower sales and support costs)

To watch a video about evaluating the degree to which Brand Equity lies with a target company versus with individual sales and service reps of the company, click here.

Written by Jeff Merkle