3 minute read 26 Apr 2018
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Buying a brand: How to judge what's not on the balance sheet

By

EY Americas

Multidisciplinary professional services organization

3 minute read 26 Apr 2018

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Investors always want to know a company’s worth – but annual reports can only take you so far. How can you identify a brand’s true value?

Assets, revenue, and expenditure can easily be valued on a balance sheet, but sometimes an organization’s biggest asset can be the hardest to put a price tag on. When weighing investment opportunities, a brand’s value should always be a major consideration.

From an investor’s perspective, a company’s annual report is typically the single most important piece of information.

But for Gary Channon, co-founder of Phoenix Asset Management Partners, a real life interaction with a brand can also provide important information on where to invest.

“Most money is invested by institutions and, in our experience, they don’t spend much time in the field,” says Channon. “If they do, they look at the world through the eyes of a wealthy fund manager, not those of actual customers.”

The value of real world research

By placing yourself in the shoes of customers, you can experience the brand first-hand and genuinely understand how it compares against competitors.

“We’re looking at consumer-facing brands, many of them with physical shops,” says Channon, “so we can put ourselves in the shoes of a customer and experience the business that way. We’re trying to judge the competitive landscape, what a customer’s alternative options are and what drives them to choose a particular business over another that may be in the same street.”

According to Channon, this should not be a one-off experiment. To get a real feel for a brand’s market position you need a more in-depth assessment of the customer experience through repeated purchases, both of the brand you are interested in and its key competitors. By studying the competitive landscape on several occasions, Channon argues that investors can lower the error rate of investment decisions. This is why “It usually takes us a few years to understand a business well enough to commit to invest in it, and often much longer,” he says.

It usually takes us a few years to understand a business well enough to commit to invest in it, and often much longer.

How balance sheets can let you down

Annual reports alone can never fully measure the value of a brand, Channon argues. These focus more on past performance than the future, which is where an investor's interest lies. Instead, Channon uses balance sheets “to judge risks and evaluate the need for capital.”

Channon’s approach to long-term brand valuation is inspired by Warren Buffet. Buffet encourages investors to move beyond the traditional, backward-looking balance sheet-focused approach to include investing in businesses with strong brands – thinking more of total long-term potential financial value, rather than short-term earnings.

Buffet has long championed the power of intangible assets for strengthening competitive positions. “He taught us to see the value of brands in the consumer space because of the pricing power the brand provides and the stability of long-term demographic habits,” says Channon.

Capital or competitiveness?

This is why, although brands that currently have low levels of capital may seem an unlikely choice for investment, their long-term development, sustainability and competitive positioning are what really matters.

So the next time you consider investing in a brand, consider stepping away from the annual reports and try experiencing the brand yourself. Understand what the brand offers customers and why it may or may not be competitive. This first-hand information could help you make better-informed long-term investment decisions.

Summary

Experiencing a brand yourself to understand what it offers, and why it may or may not be competitive, could help you make better long-term investment decisions.

About this article

By

EY Americas

Multidisciplinary professional services organization