At a glance:
- The future potential of a brand can create additional value
- There are four key sequential questions to answer when examining a brand
- Opportunity, value, whether the brand is existing or new, and how to engage people with the brand, are the central considerations
Conventional due diligence (whether financial, legal or commercial) while obviously critical from a valuation and governance perspective, tends to focus on the here and now of a potential deal and the synergies that can be achieved from an operational and logistics tie-up. But what about the value of the brand as a key driver in identifying the target and completing the deal? Brand valuation is not new and has been an asset on balance sheets for many years now. However, what is trickier is understanding the future potential – the future value that can be generated – by a brand.
The role of the brand, particularly in a consumer market, and its potential in terms of market share, consumer appeal and trade relevance, can be crucial. Whether buy-side or sell-side, investors should consider the additional value that can be created by assessing the future potential in a brand from the perspective of its customer base. This requires more than scenario planning. It’s about weaving together the qualitative understanding of market intelligence, competitive analysis, customer insight and consumer trends.
By combining that with a cold, hard, quantified look at where the revenue could lie in the future, through brand repositioning, product innovation, new categories and so on, not only is it possible to assess the potential in a brand at the point of a deal, but also to provide some potential angles for the new owners.
Building a case like this requires a mix of skills. Hard skills such as data analysis, quantitative research and modelling are combined with softer but equally critical skills such as brand planning and proposition development. Each of these skills in isolation can provide bits of the brand jigsaw, but a project that knits them together will provide a clearer sense of where the potential in a brand lies.
So how do you go about identifying this potential, and, more importantly, whether that potential can be converted into long-term value? We believe there are four key sequential questions to answer. Within these questions, there’s a host of techniques for getting to the answer, but broadly they are:
1. Where’s the opportunity?
Before looking at the brand itself, it’s necessary to take a step back and look at where the wider opportunity in the market lies. These can come from a number of sources:
- Unmet consumer needs
- Consumption/usage occasions
- Retailer/channel strategies
- Emerging/new categories
- Trends and consumer foresight
Any of these sources can be uncovered by a blend of research techniques, such as interviews with opinion formers, ethnographic research, category mapping, consumer depths and online panels. There is not a prescriptive, one-size-fits-all approach as the overall ambition and level of existing insight needs to be taken into account. Whatever the technique, the primary focus is to identify the white space in a market.
2. What’s the value?
Like most clichés, it’s very true. There may be a gap in the market, but is there a market in the gap? Once some white space has been discovered, we need to not only identify the value, but also understand why that gap exists. The purpose of this phase is to answer questions and theories such as:
- Is it a highly profitable niche that is suitable for a smaller emerging brand but doesn’t provide enough volume for a market leader?
- Is it a specialist opportunity which doesn’t meet the mainstream requirements of others?
- Are there existing brands in that space and what are their strategies?
Quantification and an early business case are the key components of this stage. If Phase 1 has shown us that there is white space, we now need to use quantitative research to value the opportunity, by both value and volume, and generate a potential size of prize.
Typically, one would expect to be able to identify:
- Total addressable market; number of consumers
- Consumer segmentation and size of each segment, by volume and value
- Identification of core target segments, their needs, attitudes and behaviour
- Propensity for each growth opportunity to engage with each segment
- Quantified priority growth drivers and their impact upon brand value and volume
- Quantified growth projections for brand; factoring in quantitative data, rate of sale, demographics and population data.
3. Existing brand or new?
Brand due diligence is typically carried out on either a single-brand business (such as Tyrrells) or segments of a multi-brand portfolio (like Premier Foods ). A critical part of the due diligence should focus on assessing not just the current brand equities, but also the ability of the transaction brand to move into the identified white space. It may be that the transaction brand is not able to stretch into this space without eroding or damaging its valuable (and valued) core equity. Therefore, brand due diligence should concern itself not only with the ability of the transaction brand to stretch; but also the no-go areas for the brand, in order to save time and money post-deal. Key aspects to consider are:
- Understanding what it will take to succeed in the identified opportunity area
- The positioning of the transaction brand in relation to this opportunity area
- Identifying what elements of the brand may need to flex/stretch
- Implications for brand investment post-transaction – for example, repositioning, communication support, innovation and further acquisition.
In some cases, it is entirely possible that an opportunity area is identified in which the brand, in its current guise, cannot enter. If that is the case, there’s a post-transaction immediate priority for the new owners to explore whether they can leverage this opportunity through:
- Brand endorsement
4. How do we engage?
Finally, but not as a final step, the all-important question is how to engage people with the brand. This includes both the people who deliver and create the brand (stakeholders, partners, employees, franchisees) and the people who connect with the brand (consumers, trade buyers, retail partners, opinion formers).
This is a critical part of the due diligence because although the execution will happen post-transaction, the planning and investment required should be considered as part of the transaction process. For example, if opportunity mapping shows that the brand needs to heavily innovate in order to reach the desired growth ambition, the investment and resources required should be planned for early and can become part of the planning process for the first 100 days post-deal.
Of course, one cannot predict what a new owner may wish to invest – if they do indeed decide to invest – as it will depend on their marketing culture, investment criteria and purpose of the acquisition. But being armed with the knowledge of what is possible means informed decisions can be made, both on the vendor and acquirer side of the equation.
Brand due diligence doesn’t provide all the answers and should never be relied upon in isolation. But when used as a forward-looking methodology to understand where the brand could go, it is a valuable means of finding, quantifying and maximising untapped potential.
Mary Say is managing director of Brand Potential.