Branding is an overlooked operational element when evaluating a target company and maximizing performance of a portfolio company. Yet it harbors the most leverage in optimizing marketing and sales, growing market share and increasing retention, and commanding price premiums.
Here’s why a focus on branding is crucial:
1. Strong branding increases profitability
A company’s marketing efficiency increases when customers buy based on their positive perception of the overall brand. This means products and services don’t have to be marketed separately and incrementally. When customers buy based on brand, marketing costs decrease and customer retention increases, resulting in higher profitability and higher exit multiples.
2. Branding is the ‘platform.’ Marketing and sales are ‘apps’
The brand is the overlying structure that enables marketing, sales, advertising and social media efforts to work properly and in concert with each other. Without a clear articulation of the brand ‘platform,’ underlying activities work inefficiently, at odds with each other, or at the whim of their manager.
3. Assessing a target’s brand health will help avoid overpaying for a target investment
As increased competition among PEs and a limited number of opportunities, multiples are increasing. It’s even more important to determine how healthy a target company’s brand is. Healthy brands are poised for growth. Unhealthy brands will restrict growth, no matter how much other operating activities are ‘fixed.’
4. PE firms will differentiate themselves by displaying a deep understanding of the importance of brand
As the pressure for PE firms to differentiate themselves increases, a focus on brand positioning will stand out. Owners of target companies feel passionately about their brand. Many in the lower middle market are multi-generation family members. Others are founders who nurtured the brand for decades. They are passionate about what their brand stands for.
5. Many middle market brands harbor hidden or under-leveraged ‘gems’ that could boost differentiation
Instead of competing purely on price, target companies with the highest growth potential have specific characteristics that may play more important roles in their customers’ buying decision. The company may have a unique employee culture, proactive customer service, deep connections with their communities, or an engaging roll-up-our-sleeves work ethic. Uncovering and leveraging these attributes may even help command price premiums.
6. Add-on brands also deserve close brand scrutiny
When assessing a potential add-on to an existing platform company, the strength of its brand shouldn’t be overlooked. Even if it’s eventually rolled up into the platform brand, it is crucial to discover hidden brand assets that can be transferred to the platform brand. This may include a unique employee culture, a compelling brand voice, or a differentiated brand positioning.
Performing a brand health check on a target or portfolio company can be the most efficient and impactful way to maximize deal returns. And making the appropriate branding fixes and enhancements sooner rather than later will yield the greatest value.
