The Financial Times had an interesting reader’s question in it over the weekend. Someone wanted to know how they could value how much the brand of their business was worth. You can see below how the answer suggests that it is truly difficult.

So, it is, but not so difficult that you can’t put a value on it. When selling a company, it is easier to value the brand than at other times as this is the occasion when the brand is simply valued by how much someone is prepared to pay for it. For example, when Nestle bought the Rowntree Mackintosh plant at York in 1988, only a fool would say that they paid the hefty sum for the bricks and mortar. And if Nestle hadn’t been interested, some other company would because Rowntree Mackintosh’s stable of brands included Kit-Kat, Polo, Fruit Pastilles, Black Magic and Quality Street – to name but a few.

Now whether the “Groovy Food Company”, the subject of the reader’s question, is worth a hefty premium is more conjectural. How well is it known? How loyal are its customers? What premium will people pay for its products? Answers to these questions are possible from market research and if they are all very positive, there could be a good premium to pay.

If this is a subject that interests you, be sure to read the final chapter in our free book in branding where Paul Hague discusses how to value brands.

Hold out for what you believe your business is really worth

By Jonathan Moules

January 27 2007

Q. When approached by either an investor or a buyer are there anyindustry rules of thumb that govern how the perceived worth of the actual brand is calculated over and above the hard financials of a business that is very much brand led? Rosie and Guy Hayward, The Groovy Food Company

A. The simple answer is no. Several ways of measuring brand value can be proposed early in the process, but these tend to go out the window once the hard process of negotiation begins.

You need to examine carefully the motivation of the potential investor or buyer. Investors only interested in making a quick return and buyers only interested in removing a competitor should be studiously avoided.

In the early stages of a negotiation, it’s common for the potential investor or buyer to suggest a high value for your brand. This is what the entrepreneur wants to hear and “paper money”, the figures on the balance sheet, suddenly becomes “real money”, the stuff you can use to buy expensive cars and houses.

Once you’re on the hook, the negotiation process becomes progressively tougher and the investing in or buying of a company magically produces some excellent reasons for a lower brand valuation. Doubts are expressed in the longevity of your business and that however good your brand is, it can be destroyed overnight. Remember Gerald Ratner?

The key is to hold out for what you believe you are worth and, most importantly, not to let the negotiations distract from the day-to-day running of the business.

Just as important as the company brand is the personal brand of the entrepreneur. The investor or acquiring company will often want the best of both worlds, preserving the illusion that entrepreneurs are still as active as before while gradually phasing them out of the business.

A draconian service contract will be proposed, with several onerous clauses designed to prevent the entrepreneur setting up in direct competition.

Good legal advice is crucial here, and my best tip is to hire a law firm at least as tough as those working for the potential investor or acquirer.

You should plan your exit carefully, well in advance, not as a knee-jerk reaction to an attractive sounding offer.

Entrepreneurs should gradually remove their own personal brand from the company, appointing professional management that can take over the day-to-day running of the business. This in itself will add significant value to your company.

These should be seasoned professionals who have been several times around the block and will be immune to any sharp practices in the negotiation process. And with a dispassionate eye, they are more likely to get a desirable valuation on your company’s brand.

This answer was from Mike Southern, co-author of The Beermat Entrepreneur

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