Beermat Club:
Ask Mike
Hold out for what you believe your business is really worth
Q. When approached by either an investor or a buyer are there any industry rules of thumb that govern how the perceived worth of the actual brand is calculated over and above the hard financials of a business that is very much brand led? Rosie and Guy Hayward, The Groovy Food Company.
A. The simple answer is no. Several ways of measuring brand value can be proposed early in the process, but these tend to go out the window once the hard process of negotiation begins.
You need to examine carefully the motivation of the potential investor or buyer. Investors only interested in making a quick return and buyers only interested in removing a competitor should be studiously avoided.
In the early stages of a negotiation, it's common for the potential investor or buyer to suggest a high value for your brand. This is what the entrepreneur wants to hear and "paper money", the figures on the balance sheet, suddenly becomes "real money", the stuff you can use to buy expensive cars and houses.
Once you're on the hook, the negotiation process becomes progressively tougher and the investing in or buying of a company magically produces some excellent reasons for a lower brand valuation. Doubts are expressed in the longevity of your business and that however good your brand is, it can be destroyed overnight. Remember Gerald Ratner?
The key is to hold out for what you believe you are worth and, most importantly, not to let the negotiations distract from theday-to-day running of the business.
Just as important as the company brand is the personal brand of the entrepreneur. The investor or acquiring company will often want the best of both worlds, preserving the illusion that entrepreneurs are still as active as before while gradually phasing them out of the business.
A draconian service contract will be proposed, with several onerous clauses designed to prevent the entrepreneur setting up in direct competition.
Good legal advice iscrucial here, and my best tip is to hire a law firm at least as tough as those working for the potential investor or acquirer.
You should plan your exit carefully, well in advance, not as a knee-jerk reaction to an attractive sounding offer.
Entrepreneurs should gradually remove their own personal brand from the company, appointing professional management that can take over the day-to-day running of the business. This in itself will add significant value to your company.
These should be seasoned professionals who have been several times around the block and will be immune to any sharp practices in the negotiation process. And with a dispassionate eye, they are more likely to get a desirable valuation on your company's brand.
Mike Southon, co-author of The Beermat Entrepreneur and Sales on a Beermat
First published in the Financial Times: 27th January 2007