Did you know that reputation can affect the value of a business? Along with other types of Intellectual Property, reputation is one of a number of intangible assets that account for more than 70 percent of a company’s market value. In today’s internet-centred world, where unpleasant comments can go viral quickly, a resilient reputation may be the most important asset a business possesses.
Developing a brand’s long-term credibility has real cash value when the company is bought or sold. A well-managed reputation will affect future earnings and market performance even when ownership changes. ‘Reputational capital’ or ‘equity’ represents the amount of goodwill in the minds of customers: the degree to which they will excuse a minor failing or misstep. It can take years of adept management to create an image that will withstand reputational damage with little or no financial consequences. This makes professional ORM services, like those offered by Reputation Defender, even more important. Reputation management isn’t a luxury cost; it’s a real investment into the present and future value of the company.
What is reputation?
Like all intangible assets, reputation can be difficult to conceptualise. It depends on the stakeholder perception of the company’s accountability and reliability across its entire range of business transactions. ‘Stakeholder’ refers to anyone with a stake in the company, including consumers, employees, investors, and communities where the company carries out business.
Reputation is most often considered in terms of customer relations, but it is also dependent on other aspects of operation. Perception of the company’s employee treatment policy and general standards of conduct related to ethical and environmental concerns are equally applicable to an overall evaluation of reputation. These factors affect a potential customer’s willingness to engage in business, as well as the availability of investment and venture funding for future projects. They are an inherent part of the organisation’s net value.
Reputational risk is another important aspect that needs to be taken into account. Risk factors include all situations that could leave a lasting impression on the company’s perceived accountability. Depending on the industry, there can be a number of factors beyond management control which would negatively impact reputation. Organisations with an effective risk management strategy in place will bounce back from negativity quickly and easily; those without, are more likely to head into a downward spiral of financial loss. Conversely, risk factors can also include positive opportunities for quick reputational development. Enterprises with a well-developed marketing capacity will be able to capitalise publicity and use it to fuel future growth.
Assigning value to intangible assets
All of the factors listed above will affect pricing when it comes to brand acquisition and disposal. However, assigning real-world value to intangible assets like reputation and other forms of IP is a complex task that requires specialist abilities and can vary across different industries. Some intangible assets refer to concrete property such as contact lists, extended contracts, and copyright or trademark. Others, such as reputation, may encompass broader aspects than the simple sale of a brand-name or trademark.
In the past, less-concrete assets have been covered under the general concept of goodwill. However, IFRS 3 Business Combinations, which became applicable in 2009, requires accountants to assign individual value to many different types of Intellectual Property whenever a business changes hands. This often entails in-depth analysis and mathematical modelling in order to develop accurate standards which intangible assets, such as reputation, are rated against.
There are essentially three methods of assigning value when it comes to IP:
- Cost-based – Evaluates the revenue investment required to create a similar reputation in today’s market. Cost-based analogies are the simplest model. Their weakness is that they fail to account for cost and value inflation since all estimates are based on the present.
- Market-based – Evaluates the brand’s value in terms of past sales involving brands deemed similar or comparable. It is effective in assuming a relevant example can be found, but this happens only rarely.
- Income-based – Arguably the most accurate method, although it is also the most complex. Income-based valuation will evaluate the asset in terms of past and future revenue generation. Most methodologies rely on Discounted Cash-Flow (DCF) analysis, a system of mathematical modelling that determines the relative value of currency today, versus its expected worth in future time projections. There are three typical ways to evaluate income from intangible assets.
- Capitalisation of historic profits – Scores assets based on a number of industry-related factors and assigns value assuming a continuation of maintainable prior earnings.
- Gross profit differential – Calculates the difference in price assignment for a branded versus a generic product. This is often helpful in determining the value of a brand-name or trademark.
- Excess profit – Evaluates the share of the profit that can be attributed to the company’s net tangible assets, and assigns the excess profit above that amount to intangibles.
Knowing reputational value can make a difference
With concrete elements like licenses and trademarks deducted, reputation makes up high a percentage of any company’s intangible asset profit. This value should be calculated into a brand’s market price at acquisition. However, it’s also helpful for CEOs and other company managers to have an accurate estimate of what is at stake when they are faced with decisions that involve reputational risk. A real understanding of a reputation’s cash value and revenue generation capacity helps to ensure responsible maintenance. It also helps to justify investment in a reputational risk management strategy that will act as insurance, in case of reputational damage. At Reputation Defender, we assist with all of these aspects concerning reputation management, so that your brand’s good name continues to be one of its most reliable assets.