Goodwill isn't a rounding error

Ferrari trades at 25.8x EBITDA – Aston Martin trades at 2.9x (November 2025). Both make beautiful cars at the top of the same market. Both have rich heritage, motorsport pedigree and devoted customers ready and willing to pay six figures for the privilege. One business has held its identity, its discipline and its leadership for decades. The other has been sold, restructured, rebranded and rescued more times than is dignified to mention. The market knows the difference. It has priced the difference, and brand is the variable.

Here, "brand" does not mean advertising. It means the set of psychological advantages enabling a business to sustain preference, trust and pricing power.

The modern investment model pays for these assets at acquisition, then manages them as if they were operational.

There is a category of value at the heart of every PE acquisition that the investment committee rarely tables. On the balance sheet it appears partly as identifiable intangibles, brand equity, trademarks, customer relationships, and partly as goodwill: the residual premium paid for everything the accounting framework struggles to put in its correct box. In most consumer-facing acquisitions, together they form one of the largest components of the asset side of the ledger. And in almost every value creation plan written in the last decade, they receive little or no attention.

Not because they are unimportant, but because they are both illegible and inoperable.

The 100-day plan focuses on financial reporting systems, working capital, IT infrastructure, supply chain and cost reduction because these are the things that can be measured, attributed and presented at a board meeting in short order. Brand investment, which takes eighteen months to register in customer behaviour and three to five years to register in pricing power, does not survive contact with a quarterly reporting cycle. So it gets deferred and not because anyone in the room thinks it does not matter, but because it slips through the framework.

The paradox sits in plain sight. Firms are paying record entry multiples of 11.8x EBITDA (McKinsey's 2026 Global Private Markets Report has the data) for businesses whose value depends heavily on psychological assets. Reputation, trust, and market position. The willingness of a customer to pay more for the same product because of what it means rather than purely what it does.

Then, having paid for those assets, most of the post-acquisition attention shifts toward operations, because they are legible and by definition operable.

The Ocean Tomo 2025 study puts intangibles at approximately 92% of S&P 500 market capitalisation. The industry pays for them at entry and largely underweights them during the hold. The result is the same business being acquired and groomed for sale on a model that treats less than 10% of its actual value as the priority.

Good firms know this and the best operators already capitalise on it. The issue is not absence of understanding. It is the persistence of systems and incentive structures that quietly but inevitably guide against the kind of analysis that would price and leverage an intangible properly.

What follows seeks to name that problem properly. Why the industry built itself around the wrong measurable. What it costs at exit. And what a value creation plan looks like when it treats brand as a capital asset rather than a functional cost.

The operator's imperative has arrived. The vocabulary hasn't.

For most of the last decade, PE returns were generated by a mechanism that had very little to do with operational excellence. According to analysis by StepStone Group, cited in McKinsey's 2026 Global Private Markets Report, leverage and multiple expansion together accounted for 59% of buyout returns between 2010 and 2022. The model was elegant in its simplicity: buy at a reasonable multiple, finance with cheap debt, wait for the market to re-rate, sell at a higher multiple. The factory barely needed to change. The financial structure did the work.

Those days are gone.

For three years now, the macro tailwinds that produced more than half of historical returns have been gone. Interest rates have stayed high. Multiple expansion has stalled or inverted. Debt's contribution to entry multiples has fallen from 44% in 2016 to 37% in 2025. Entry multiples themselves reached a record 11.8x EBITDA in 2025. Operating groups at PE firms have more than doubled in size since 2021. The industry has correctly diagnosed that it now needs to generate genuine operational and revenue-side value. It has invested heavily in the infrastructure to do so. McKinsey's framing is direct: "Alpha is less likely to emerge from market dynamics alone. Increasingly, it will be made."

What the industry as a whole has not yet done is identify brand as the mechanism for making it.

The Alvarez and Marsal 2024 Value Creation Survey, one of the most comprehensive assessments of PE operational practice available, lists technology, AI, operational transformation and organic growth as the primary value creation levers, with brand notably absent. The KPMG 2025 value creation report identifies "brand erosion and cultural drag" as a risk of aggressive cost-cutting. It does not include brand investment as a positive value creation lever anywhere in its framework. Grant Thornton India's 100-day plan survey, a comprehensive study of PE practice in the first 100 days, confirms that PE firms in the first 100 days focus on financial operations and reporting systems, working capital, IT, supply chain and cost reduction.

The pressure is not only financial. As AI systems absorb the measurable operational work, financial reporting, supply chain optimisation, working capital management, procurement, the value that remains to be created sits increasingly above what we call the automation line.

Rory identifies the underlying mechanism. As he put it in conversation with Camille Moore:

The biggest problem (in branding right now) is the false God of perfect ROI calculation and prediction in advance... The treasury or the finance function is extremely unwilling to invest in anything which has the slightest degree of speculative value. And so we end up, particularly in the Anglo-Saxon world, with an efficiency-driven race to the bottom rather than an opportunity-driven race to the top.

That race to the bottom is exactly what AI now accelerates. Brand thinking – brand investment – is the thing left that can pull you in the other direction.

Once operational competence becomes ubiquitous, the remaining premium sits in perception, trust and preference. The commoditised half of value creation is getting more commoditised. The uncommoditised half is brand. As Ian Whittaker puts it:

AI is the ultimate efficiency tool. If your model is built on efficiency, it gets competed away. What's left is effectiveness.

The equation now is efficacy: end results, not unit economics. Pricing power, customer trust, exit premiums, the assets that determine outcomes rather than throughput, are exactly what brand investment produces. Most PE firms are still operating with peacetime structures in what is now a wartime economy.

The industry has spent three years building the infrastructure for a new kind of value creation. It has hired the operating partners, extended the hold periods and accepted the higher entry prices. It is searching, with considerable urgency, for the lever it has not yet pulled. Brand is that lever. It has been in the room the whole time.

What brand actually does to a business, financially.

I saw a version of this first-hand while working on a brief for The i newspaper before its sale. My strategy centred on a simple proposition: "The Value of Brevity", which came to life as “Get to the point” in comms. The work ran across TV, print and programmatic. The campaign exceeded its sales target of 6%. More importantly, it clarified what the business was actually worth to a specific type of reader. The point was not the advertising. The point was that a sharper identity changed commercial behaviour, and that commercial behaviour changed the conversation a buyer was willing to have. JPI Media had paid £24 million; three years later, in November 2019, the Daily Mail and General Trust acquired the title for £49.6 million. The brand work was not the whole story. It was the part of the story that changed the financial conversation.

The same logic compounds at scale. The Thomson Reuters Financial and Risk carve-out was acquired by a Blackstone-led consortium in 2018 at a $20 billion valuation. The Refinitiv repositioning - which I worked on at TBWA - reframed the business from a legacy data terminal inside a corporate parent to an open financial markets infrastructure platform. LSEG acquired the entity in 2021 for $27 billion. The data was the same. The engineers were the same. The customer base was the same. Seven billion dollars of enterprise value sat in the repositioning. That differential was central to what I submitted to the IPA as an entry.

This is not a sector specific phenomenon. It plays out wherever a customer has a choice. Consumer goods, B2B software, industrial services, healthcare. The mechanism is the same: when a business becomes easier to choose, easier to trust, or harder to replace, the economics improve. Customers pay more. They leave less often. The asset being built is psychological. The financial consequences are not.

Brand is a financial asset that happens to be built through marketing and product. The distinction matters because it changes what questions get asked in a value creation plan.

Three mechanisms.

Pricing power. The market has been showing the case for sixty years. Apple trades at 7.84x sales. Dell trades at 0.8x. Both ship boxes of metal and glass. One has built an ecosystem people identify with. The other competes on price. The willingness of a customer to pay more for the same product is a direct contribution to EBITDA margin. A business that sustains a 5% price premium over its category average on £50m of revenue generates £2.5m of additional EBITDA annually without touching its cost base. At an exit multiple of 10x, that is £25m of enterprise value created from a pricing advantage that was built, not inherited. The brand investment that produced that pricing power is rarely modelled in the value creation plan.

Customer acquisition cost. Brand awareness and reputation reduce the cost of acquiring new customers. A business that is known and trusted in its category spends less on paid acquisition and conversion. CAC reduction flows directly to margin. It is measurable. It is almost never measured in the context of brand investment.

Goodwill at exit. The accounting treatment captures synergies, workforce, distribution advantages and future cash flow expectations beyond what identifiable assets alone can guarantee. In consumer-facing businesses, a substantial share of the residual is psychological. Trust, reputation, the position a business holds in a buyer's mind (aka mental availability), pricing power. Regardless of whether or not the accounting framework labels them.

Strategic buyers know this and price it. LVMH paid 21x EBITDA for Tiffany. Luxury jewellers typically trade at 15 to 18x. LVMH paid the premium because Tiffany blue was a balance sheet item hiding in plain sight as a colour. The same logic plays out across every consumer-facing sector. Businesses with strong, coherent brand positions and distinctive assets attract more competitive sale processes, more strategic interest, and materially higher exit premiums than operationally equivalent businesses without them. The precise attribution is difficult, which is, as we argue, part of the problem, but the direction of the relationship is not in dispute.

The paradox about goodwill is that it is the one asset on the balance sheet that firms reliably pay for and reliably underweight thereafter. They acquire it at entry. They do not always cultivate it during the hold period. Then they are surprised when it has not grown.

What the City has known for years, and PE has not yet priced in.

Ian Whittaker, twice City AM Analyst of the Year and Managing Director of Liberty Sky Advisors, has spent two decades at the intersection of brand investment, capital markets and corporate strategy. He advises CFOs, boards and growth-stage companies on how the institutional view of intangible assets is shifting in an AI-saturated economy.

His take is simple.

Financial analysis isn't blind to brand. It's just not built to see it.

The difficulty is structural. The analytical frameworks used in public markets are designed around twelve-month cycles. Brand does not operate on a twelve-month cycle.

If you're an analyst, brand sits in SG&A. It's a cost. It reduces EBITDA this year. The return doesn't show up in the model. The cost does.

When assessing a listed media or consumer business, the standard model focuses on revenue, EBITDA, free cash flow and return on invested capital. Brand investment appears immediately as a cost. The return, which accrues over three to five years through pricing power, reduced customer acquisition cost and market share resilience, does not appear in the model at all.

It’s not ignored – it’s unmodelled.

The consequence is systematic.

Given the markets rewards cost cuts, it incentivises firms to cut brand and penalises them for investing in it, especially when times are tough. That's not because investors are irrational. It's because the returns don't show up in the timeframe they're measuring and reward.

Listed companies that invest in brand are penalised in the short term. Those that cut are rewarded for margin improvement, even when that improvement is borrowed from future goodwill. The seemingly prudent present penalising the profligate future.

Private equity has not escaped this logic.

Private equity hasn't solved this. It's just moved the same problem from the earnings cycle into the hold-period cycle.

The logic is identical. The timeframe has changed but the outcome has not.

In both cases, the framework selects for what is measurable now and excludes what compounds later. The result is a consistent underinvestment in the asset that ultimately determines pricing power, resilience and exit premium.

Goodwill at exit is the accounting record of brand investment compounded or starved. You pay for it on the way in, and you pay for it again on the way out.

Why the bias is structural, not accidental.

Ian Whittaker's view from the City confirms what the PE data shows. Brand's exclusion from value creation plans is not a knowledge gap – it’s structural omission. Firms are built, staffed and incentivised in ways that systematically squeeze out the kind of analysis that would price an intangible properly. Three forces produce that outcome.

The measurability incentive. Value creation plans are written by finance professionals and operational consultants whose credibility depends on delivering measurable outcomes in defined timeframes. Brand investment produces outcomes that are real but diffuse, long-dated and difficult to attribute cleanly to a single decision. In a 100-day plan, there is no natural home for an investment whose primary return crystallises at exit rather than in the next board pack. The incentive structure inclines against it, not through bad faith, but through the ordinary operation of professional self-interest.

As Rory observed:

There is an enormous dose of self-interest in pretending that quantification will provide you with all the answers, because that is what they sell.

The advisory firms that write value creation playbooks are optimised around deliverables that can be measured, reported and attributed. Brand investment is harder to package, slower to crystallise and more difficult to claim credit for. It is structurally disadvantaged in the advisory ecosystem before anyone has made a single decision.

He has made the same point even more sharply in his Market Research Society column:

The price you pay for quantification is that it rapidly turns from servant to tyrant. Many highly effective and potent forms of marketing activity simply do not (indeed, cannot) deliver their results immediately. There is an enormous hidden price you pay once you become addicted to the crack cocaine of accountability. You become incapable of justifying anything that isn't immediately measurable, even when it might be eminently sensible to do so.

The hold period mismatch. Brand investment accumulates over time. A 4-7 year hold period is long enough to see the return at exit, but the investment should begin at entry to fully benefit, not in the final twelve months as an exit-readiness exercise. Most PE firms treat brand as a pre-sale polish rather than a hold-period growth programme. This is the equivalent of planting an oak the year you want it to provide shade.

The professional monoculture. The people who conduct due diligence and write value creation plans are almost entirely drawn from finance, strategy consulting and operational management. Brand, a psychological asset, is evaluated, if at all, by the same people using the same tools they apply to the physical and financial dimensions of the business. Rory describes this as a structural problem:

The world is dominated by engineers and finance people and accountants and people looking at effectively quantities. We spend vastly more time looking to solve problems through objective means than through subjective means. The ratio of effort we put into one is ridiculous compared to the other.

The value creation plan is a precise institutional expression of that ratio. The people writing the plans are, almost without exception, trained in the tools that measure everything except the asset in question.

What a brand-as-capital value creation plan looks like.

The prescription is not complicated. It is unfamiliar. Most of it happens earlier in the deal cycle than the current playbook allows.

Brand due diligence, not brand audit. The correction begins before the purchase agreement is signed. At the point of diligence, brand should be assessed alongside financial and operational due diligence with the same rigour. This is not a brand health survey. It is a financial assessment: what is the current brand equity worth in terms of pricing power, customer acquisition efficiency and goodwill potential? What is the gap between current and achievable brand value over the hold period? The output should inform the bid, the investment thesis, and specific clauses in the purchase agreement covering brand-related commitments from the seller through to completion. Pricing brand at diligence is how a buyer avoids overpaying for an asset that is already eroding and secures the protections needed to cultivate one that is not.

Brand investment as a capital allocation decision. Brand investment should appear in the value creation plan as a line item with projected returns, not as a marketing budget. The question is not "how much should we spend on marketing?" The question is "what is the return on investing £X in brand equity over five years, expressed as incremental pricing power and goodwill at exit?"

Pricing power as a primary KPI. The value creation plan should track pricing power, the ability to sustain price premiums relative to category, alongside EBITDA margin, revenue growth and working capital. Pricing power is the most direct financial expression of brand equity. It is measurable. It is not currently measured in most PE portfolio monitoring frameworks. In practice this means a monthly board pack that reports realised price versus category-average price, the trend of that gap over the hold period, and the delta in CAC between branded and non-branded acquisition channels. Three numbers most PE portfolio companies could produce within a quarter and almost none currently do.

Exit narrative built from entry. The brand story that a strategic buyer will pay a premium for at exit needs to be constructed from the day one of ownership, not assembled in the data room in the home stretch before sale. The equity story is not a communications exercise. It is a value creation output, and it takes time to build.

Some firms build their exit narrative in the final year of ownership. They are, in effect, trying to sell a story that hasn’t reached its audience. Strategic buyers note the difference. They are paying for a future they can believe in. Brand gives that belief concrete financial expression.

The close.

The intangible revolution did not happen to PE. It happened to every business PE owns. The assets buyers pay a premium for at exit, trust, reputation, pricing power, the psychological distance between a brand and its nearest competitor, are being built or eroded every day during the hold period; whether or not they appear in the value creation plan.

In an AI-saturated market where efficiency is commoditised and outputs converge, trust and preference become the scarcest premium. Preference makes pricing power repeatable, and repeatable pricing power is what compounds into enterprise value, the thing the goodwill line at exit is reaching for and usually missing. Brand is the substrate beneath all of it.

Whether brand creates financial value is no longer in dispute. Ferrari has answered it. Apple has answered it. Buffett answered it in 1972 when he paid three times book for See's Candies and watched the asset return fifty times the investment over the next thirty-five years.

The market has been pricing this variable for sixty years, across categories, across geographies, across cycles.

What remains open is whether PE will start pricing brand at diligence, investing in it during the hold, and harvesting it at exit. Or whether the industry will continue to pay for it, manage it as something else, and wonder why the goodwill it acquired failed to grow.

They paid for it, then managed it as something else, and it quietly atrophied. That is not a market failure. It is a category error wearing a spreadsheet.

Goodwill is not a rounding error. It is the return on the investment that was never made.