Your Business May Be Worth More than You Know
Review of Branding for Buyout by Ted Schlueter, April 27, 2022
Shondra Lee’s favorite aunt, Kathryn, just invested $5,000 in Shondra’s startup venture , The Baby Biddy. The Baby Biddy is still more of a concept than a business. When she deposited the check, Shondra didn’t realize that she had just sold her company. Yes, of course, she knew she had sold a tiny slice of equity to Aunt Kathryn. But that’s not what I mean.
Whenever an entrepreneur sells shares in her company, she has implicitly promised to build the company towards a liquidity event, a moment in time in which the total value of the company is turned into the cash needed to return the investors’ money plus, all hope, a substantial bonus.
That’s one of the gems readers learn from Ted Schlueter’s new book, Branding for Buyout: How to Tell Your Story and Get the Deal You Deserve.
Everyone in the venture capital world knows a startup venture must work toward either an IPO, a merger, or a sale — a buyout. It’s the logic of venture investing. Institutional investors (VC firms, private equity firms, family offices) must get their money back at some point. The Aunt Kathryn’s of the world would like to see a return as well. The firm needs a liquidity event to make that happen.
That, however, is not the main message of Branding for Buyout. The main message is that your venture is almost certainly worth more than the financial statements reveal. They don’t tell the full story.
To get that additional value in a sale, you must discover and reveal it. The lessons described in Branding for Buyout can help you do that. An expert with years of experience in branding and marketing, Schlueter formed The Grist, a Boston-based branding and marketing firm, to help ventures work through the process.
Conventional business valuation wisdom says that a going concern is worth some multiple (commonly 3 times) its average earnings for the past five years. How could your firm be worth more?
Answer: Intellectual Capital.
“But we don’t have any patents,” you might reply. I’m not talking about patents. Patents, trademarks, copyrights, and trade secrets all fall into the category of Intellectual Property, a sub-category of Intellectual Capital.
A firm’s Intellectual Capital is the total knowledge, practices, and relationships of trust that it has built up over its life. That includes the hard knocks knowledge acquired from the mistakes you’ve made, the norms that have become part of the culture, standard operating procedures, relationships with vendors, marketing knowledge, and everything else that goes into the catchall called organizational culture. All of that Intellectual Capital has value as the means for generating revenue. But it is also the launching pad for growth.
There’s an old story about an expert brought in to solve a problem with a steam engine that had stumped the inhouse engineers. The problem was costing the company thousands of dollars a day. The expert examined the machine and after about 45 minutes took out a hammer and gently tapped on one part of the machine. The engine began humming. Problem solved.
A week later the company received the expert’s invoice: $10,000. The controller thought this a bit expensive for only 45 minutes of work and asked for an itemized statement. The expert complied: “Examining Engine: $50. Tapping on Engine: $5. Knowing where to tap: $9,945.”
If your company has done well, it knows where to tap.
A study conducted by Ocean Tomo concluded that 90% of the S&P 500's asset value consists of intangible assets, that is, Intellectual Capital. [“Intangible Asset Market Value Study,” Ocean Tomo (2021).]
Schlueter quotes Gary Cormier, former EVP of Human Resources at Brass Ring, “When you’re selling HR, you’re selling a relationship. . . . You’re selling trust.”
You can’t buy trust. But, if it’s part of your firm’s Intellectual Capital, you can sell it. (Ask Ben Cohen and Jerry Greenfield of Ben & Jerry’s Homemade how much Unilever paid for the trusted brand. They could have easily reverse-engineered the ice cream.)
Helping you mine for the nuggets of value in your firm’s Intellectual Capital and bringing them to the surface is what Branding for Buyout is all about. But it’s not about creating another spreadsheet. It’s about converting that information into stories.
Stories sell. As Schlueter writes, “[T]o have value — something an investor would want to be a part of, or an acquirer would want to buy — you need to find the chord that not only makes the emotional connection but also gives a vision of what the brand could grow into and be.”
The book makes the point by telling numerous stories about how Schlueter and others at The Grist have helped clients find, display, and sell much more value than the numbers contained in the confidential investment memorandum.
He adds, “[E]very business has a chance to make an emotional connection with a potential customer, because the best businesses specialize in taking away pain points and making things easy.” The value proposition of your business for its customers translates into value for a potential buyer of your business.
Let’s get back to Shondra Lee. She’s just starting out. She’s years away from a liquidity event. She doesn’t need to read Branding for Buyout until she gets there, right?
Wrong! Branding for Buyout is full of guidance about building for buyout from the beginning. “You can build your brand so that every touchpoint is calibrated for a potential sale,” Schlueter says.
When Shondra Lee sold shares to Aunt Kathryn, she implicitly committed to building for buyout, which means branding for buyout. With the wisdom contained in Branding for Buyout, The Baby Biddy might exceed even Shondra’s expectations.