A brand is born
The Lizano brand was originally created in Costa Rica by Mr. Próspero Lizano, in 1920. It was born with the Lizano Pickle and later with the Lizano Sauce, then the Tabasco Lizano Chile was added. In 1988 the brand's first campaign was launched, under the Mayonnaise Lizano product. It has become one of the Central American brands with the greatest history and heritage. It was bought many years ago by Unilever, one of the leading companies in the food business with more than 400 brands in 14 categories.
A living example of the value of a brand
Why do I start with this review? Because what happened in the purchase process is a living example of the value of a brand. It is said - behind the scenes - that when the Lizano factory was bought, Unilever had to pay more money for the brand than for its land, facilities, machinery and equipment. It is said that they bought the infrastructure first, but then they realized that they had to buy the brand as well. It turned out to be the company's most valuable asset.
It is a classic example of brand value
In Finance we have been dealing with the registry of intangible assets for many years. We say that during the 1970s, financial statements only reflected 60% of a company's assets. Today, we speak of only 20%. Companies today have very valuable “intangible” assets that are not reflected in the financial statements. Companies create value, which the accounting accounts still cannot reflect using the traditional system of accounting records.
This does not happen only in companies that operate on the Internet, where one of their value criteria is the "number of visits" they receive each month. It also happens in companies outside the Internet. The trust and credibility that a brand acquires over time. A truly innovative product will be more successful if it is launched under a reputable brand.
There are plenty of examples of what I said in the previous paragraph: think of vehicles, health products, hotels, banking, and so on.
Useful information versus reliable information
Unfortunately, for entrepreneurs and third parties, such as investors and bankers, the most reliable accounting information is not always the most useful, and the most useful financial information is not always the most reliable. A classic case is the contribution margin of a product: it is vital data for decision making and managerial control, but the information about unit cost is not always completely reliable.
One of the most valuable intangible assets that “cannot be registered” with traditional accounting principles is “brand equity”. Companies generate value that is not possible to register, and the market capitalization that they have earned through the years is one of them, the brand is perhaps the most representative.
Indebtedness considering commercial credit or not
It is always controversial that the value of commercial credit is accepted. Banks do not take this value into account as part of their total assets, even though the company has invested thousands of dollars creating that value, with a successful brand positioning, profitable products, a stable client portfolio and strategically allied suppliers.
This is due to several reasons:
- There are data that are difficult to measure and quantify
- The traditional accounting mentality that prevails
- Uncertainty
- The introduction of subjective judgments and arbitrariness
- Lack of information and training
- Reasonable doubts about identifying and separating those values
Two very ours examples of the price of a business
At the beginning of 2010, the company of one of my clients was offered to buy for 18 million dollars, but the owner did not sell it for less than 21 million. Where does this value come from? The land, facilities, machinery and equipment, plus some tangible assets are worth about 12 million and the debts 8 million dollars. Discounting the estimated five-year flows gives $ 15 million. What is the true value? On the other hand, the Financial Statements show an indebtedness of 65%. If it registered at least 25% of the estimated commercial value, its indebtedness would be 40%; but banks would not accept that financial information as reliable.
This same year, another client put their businesses up for sale, signed a contract with a business brokerage company that is looking for investors with the potential to buy. Without seeing financial statements or projecting cash flows, they set a price of $ 6 million. I know the business quite well, and the return the company founder gets every month is impressive. He recovers his investment in 30 months every time he opens a new store. I estimate that the company is worth at least $ 10 million. The difference is abysmal. How much is your business really worth?
This is the most important part of the article
With this article I intend to make you aware of several aspects to consider when you want to buy a company, sell yours or know the heritage you have built.
As an entrepreneur, you already know this intuitively:
• Your company is more than its tangible assets (land, facilities, machinery and equipment).
• The value of your company cannot be reflected in the traditional financial statements prepared by your accounting department, much less the annual audited financial statements.
• Neither can your value be the result of the appraisal that a “specialized” expert makes of the lands and facilities. Those appraisals are only useful for banks.
To know the true value of your company you need other financial valuation methods:
• Market value of the company
• Potential for future benefits
• Positioning of the company and its products in the market, client portfolio, alliances with strategic suppliers.
The price will be finally resolved in the negotiation between the parties
In the end, the real price of a company will be established in the negotiation between buyer and seller. The price can be capricious, depending on the circumstances at the time of purchase that the parties experience. Of course, it depends on the market trends. The price can vary dramatically from one week to the next.
The most important thing is that the financial statements are not enough, neither are the cash flows, nor the discounting of future flows, much less the empirical value systems that multiply sales or profits by a factor.
The price is established by the seller and the buyer, according to the interest that each has in the business. Seven years ago a friend sold his company for $ 7 million, for a difference of only $ 100,000. That happens…
Do you know how much your company is worth? Do you know how much your brand is worth? Do you have a strategic plan that increases the value of your business?
