How do you value reputation in DD
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In any acquisition one of the main values of a company you want to purchase may be their reputation in the market.
While this is very important, I do not think it’s easily quantifiable and was wondering if anyone has seen any metrics/value calculations that would seem to quantify the value of a reputation.
The valuation of reputation is something that I understand as the premium the buyer is willing to pay. Reputation is an intangible asset to a business that is often not recorded on the balance sheet (aside from Goodwill which occurs through the process of acquisitions). As such, reputation can only be valued as what a buyer is willing to pay and what the seller is willing to accept which is all subjective. Any premium that is paid in excess of a company’s listed assets or share price would be accounted on the books as goodwill, and so reputation can be reliably quantified/calculated after the acquisition.
Great question, and something my company encounters quite frequently. I’ve found that sellers often tend to overestimate the value of their reputation. I would be very interested to know if anyone has developed some sort of formula for this.
In my opinion, it depends on industries, reputation may play vital role in banking, education, services….but in the others like foods, raw materals, etc, it seems less important. therefore, methods to value reputation also is also different in each industry
Indeed, the reputation of a company is a critical intangible asset that significantly influences its value, especially in the context of an acquisition. While reputation is inherently challenging to quantify due to its subjective nature, there are several indirect metrics and value calculations that can provide insights into its impact on a company’s overall worth such as brand recognition and awareness, media sentiment analysis, employee satisfaction and engagement, industry awards and recognitions and customer retention rates. While these metrics provide a qualitative understanding, assigning a specific dollar value to reputation remains challenging. However, during the due diligence process, these indicators can be considered alongside financial metrics to form a comprehensive view of the company’s overall health and potential future performance.
I see reputation as the proof of who the company really is versus who they believe and say they are. There may be two companies in the same industry that have the same financials, but one has a significantly better reputation. The one with a better reputation has a more likely chance to continue to grow and increase profitability. This will justify slightly more aggressive financial model numbers and the delta when compared to the other company would be the value of their reputation.
In DD, the evaluation of reputation is an essential aspect. In my opinion, reputation plays a critical role in assessing the overall health and potential risk associated with an individual, organization, or any subject of investigation. We should always pay attention regarding:
Past Performance, Stakeholder Perception, Media and Public PerceptionIt could be view as part of the goodwill. The market value above book value, can be view as the “reputation/ goodwill” of the company. The higher the goodwill, the so call more reputable this company is.
Valuing reputation is critical in any M&A. While reputation is an intangible, which will ultimately be part of the premium paid on an acquisition, validating it is different. Validating reputation should be approached through multiple lenses, including the perspectives of the customer, employee, investor, industry regulators/ authorities, and competitors. Validation can be accomplished through employee engagement surveys, customer surveys, reviewing of analyst reports, regulatory barriers surpassed, and accomplishments/awards, while also keeping an eye out for the negative aspects, such as penalties/fines, litigation and governance policies.
If I were to try and ‘translate’ reputation into metrics, I would first try and find out what good reputation actually means. What areas does it relate to? Is it quality of goods? Quality of service? ESG standing? Anything else? Then, thinking about affects of the ‘good reputation’, you may want to translate this into certain analysis. For example, what % of goods is returned on warranty? What is the client retention if it’s a service industry? What do client testimonials say (if available)? Has there been any positive or negative press recently? I think ‘reputational DD’ would be very much like any other – all you are trying to find out is whether what the target says is supported by facts.
How much of a value it is to the buyer will very much depend on the buyer’s strategy and will be included in the premium the buyer would be willing to pay, if valued at all.
Reputation is very important in companies with no strong moats. These brands will typical have a higher return customer, lower CAC, and a happier workplace and culture.
Assessing a company’s reputation during due diligence means looking at both the numbers and what people are saying to determine its position and reliability in the marketplace. This process involves examining how the public perceives the company, feedback from stakeholders, adherence to legal and ethical norms, and accolades within the industry. Furthermore, understanding the financial benefits of a good reputation, through factors like customer loyalty and brand value, aids in measuring its impact on the company’s overall worth.
In terms of financials, one would assume that the value of a company’s reputation is reflected in the prices it could achieve for its products, hence, it is already reflected in the revenues generated.
In terms of DD, the potential future growth perspectives and value perspectives resulting from the reputation of a company should be analysed in the course of the commercial DD of a target company (trough brand analysis, brand rankings, customer surveys, employee engagement surveys, analyst reports, etc).
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