Geoff Hattam | Monday June 25th 2012
Hattam McCarthy Reeves Director, Geoff Hattam is our guest blogger this week. Geoff has kindly contributed his thoughts on the importance of good branding and its value in a financial sense; especially when it is time to grow or sell your business.
Many business owners correctly attribute a significant value to their brand. However unless you have actually acquired the brand from another business, in accordance with the ‘rules’ of accounting it won’t be reflected in your balance sheet as an asset
of your business. This can be a limiting factor when raising funds from banks or equity investors, or in trying to assess if the value of your brand has increased.
One strategy you may consider is to commission an independent valuation of your brand, which can supplement your financial statements. Valuation is typically more art than science, but there are accounting firms and business brokers who specialise in this
field.
If like many small businesses, you operate with a single brand, then as a rule, the value of your brand is likely to be reflected in the ‘goodwill’ of the business. Goodwill is defined by accountants as the value of a business over and above its tangible
assets.
A small business is typically valued by assessing its earnings capacity or its ability to generate profits into the future. The value is then, in simple terms, the amount someone would be prepared to invest to obtain that future profit or cashflow. As
with any investment decision, the required level of return will increase as the level of risk increases and generally small businesses tend to require a greater rate of return, reflecting the greater risk.
The Value equation
Value of business = Future earnings/required rate of return
As an example, if a business earns $100,000 each year and an investor requires a 25% return, then the business value is $400,000. If the tangible assets of the business are $250,000, then the brand (or goodwill) is the difference between the value and the
tangible assets, i.e. $150,000.
Larger businesses are usually valued with much lower required rates of return reflecting their lower level of risk.
A regular valuation is then seen an important aid in monitoring the performance of your business and central to many decisions at both strategic and operational levels.
So while you may be busy focussing on balancing your books, don’t forget your brand is an asset too. Don’t take it for granted, recognise it, build it and don’t underestimate its value to you and your customers. It may be one of your biggest assets especially
if you decide to sell or grow your business.
Geoff Hattam
Director
Hattam McCarthy Reeves
Chartered Accountants and Business Advisors