In the context of mergers, acquisitions, and capital raises, investors are not just buying technology; they are buying future cash flows. The primary enemy of that transaction is risk.
While manufacturing CEOs often focus on"de-risking" their technology through R&D, they frequentlyneglect the commercial "de-risking" provided by a strong brand. Drawing on Information Economics and Signaling Theory, this article explains why a polished industrial brand is not a vanity asset,but a critical mechanism for reducing perceived risk and increasing valuationmultiples.
The Problem: Asymmetric Information in Industrial Markets
Industrial markets are characterized by asymmetric information. This economic concept describes a scenario where one party(the seller) possesses more information about the quality of the product than the other party (the buyer or investor).
In complex manufacturing—whether it’s robotics, chemicals,or aerospace components—this gap is profound. You know your technology works;the potential investor only has your word and a few spreadsheets. Thisinformation gap creates high anxiety and high Perceived Risk. When an investor cannot perfectly assess the technical reality inside your factory,they naturally discount the valuation to buffer against the unknown.
Brand as a Credible Signal
This is where Signaling Theory enters the equation. Originating from information economics, this theory posits that inmarkets with imperfect information, a brand acts as a credible"signal" that conveys information about unobservable quality.
A strong brand is not just a logo; it is a heuristic (amental shortcut) that reduces search costs and the cognitiveload required to evaluate a company. When a manufacturing firm invests in ahigh-fidelity brand system (professional digital presence, clear positioning, coherent identity), it signals credibility. It proves the company possesses the resources, discipline, and long-term horizon necessary tomaintain a reputation.
Research confirms that a clear brand signal increases the buyer's Expected Utility—the perceived value of the deal—by bridging the information gap.
Quantifying the "De-Risking" Effect
For investors, risk is a proxy for volatility. A companywith superior technology but a weak brand is viewed as a volatile asset because its revenue relies entirely on technical specs that competitors might copy.
Academic meta-analysis demonstrates a moderate negative correlation between Customer-Based Brand Equity (CBBE) and Perceived Risk. In simple terms: as brand equity goes up, the perceived risk of doing business with you goes down.
A strong brand "de-risks" the company for an investor or acquirer in two ways:
1. Revenue Stability: High brand equity correlates strongly with (Re)Purchase Intention. Investors pay premiums for companies with predictable, loyal customer bases, not just one-offtransactional wins.
2. Competence & Sincerity: In the industrial sector, the most valuable dimensions of Brand Personality are Competence (reliability, responsibility) and Sincerity (honesty),. A brand that signals high competence reduces the investor's fear of operational failure.
The Bottom Line
If you are preparing for an exit or a fundraising round,view your brand investment through the lens of risk management. A polished brand is due diligence shorthand. It signals to the market that your operational house is in order, your market position is defensible, and the riskof acquisition is low.
By reducing the Perceived Risk associatedwith your complex technical operations, you don't just attract more investors; you command a valuation that reflects the true quality of your engineering.
References
Aaker, J. L. (1997). Dimensions of Brand Personality. Journal of Marketing Research, 34(3), 347–356.
Erdem, T., & Swait, J. (1998). Brand Equity as a Signaling Phenomenon. Journal of Consumer Psychology, 7(2),131–157.
Farrokhi, M. (2020). Working Together toward a Better Brand: Customer-Based Brand Equity and Co-Creation of Value with Consumers(Doctoral thesis). University of Calgary, Calgary, Canada.
Stigler, G. J. (1961). The Economics of Information. Journal of Political Economy, 69(3), 213–225.
