Six Reasons Why Private Equity Should Focus on Branding

For private equity firms, brand is a strategic asset that can influence everything from marketing efficiency to customer retention and even exit multiples. It harbors the most leverage in optimizing marketing and sales, growing market share and increasing retention, and commanding price premiums.

A healthy (i.e., strong and clearly articulated) brand can drive growth, unlock hidden value, and maximize returns—both for the target company and the overall portfolio. So, let’s explore why a focus on branding—including regular brand health checks—is crucial for private equity.

6 reasons why private equity should focus on branding

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” while 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 discretion of individual managers who may or may not appreciate the importance of brand consistency.

3. Assessing a target’s brand health will help avoid overpaying for a target investment

With increased competition among PEs and a limited number of opportunities, multiples are increasing. It’s now even more important to determine a target company’s brand health. Healthy brands are poised for growth. Unhealthy brands will restrict growth, no matter how much other operating activities are “fixed.”

4. PE firms can 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 brands, as 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 and want it respected.

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 decisions. 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. 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.

Harnessing brand to drive long-term value creation

In sum, private equity firms can uncover new opportunities for growth and differentiation by treating branding as an integral part of the investment process. When they align brand strategy with business strategy, PE firms can amplify growth, drive differentiation, and set portfolio companies on a path to long-term success.

Want to discuss enhancing the value of your portfolio through brand? Contact us.

Originally published April 7, 2021.