When you buy a company, you’re also buying a brand.

When one company decides to acquire another, it sets in motion a long, deliberate and expensive due diligence process that involves CPAs, attorneys, engineers and business analysts. The stakes are high. A lot is on the line.

Often overlooked in the process, though, is a comprehensive evaluation of the acquired company’s brand. The consequences for ignoring this step can be significant.

The power of brand halo

A brand is more than the ugly logo that came for free with your acquisition. A brand is a promise of the experience stakeholders will have when they engage with the company. Tiffany’s blue box is part of its brand, but no more so than the inherent promise of quality and service that customers are willing to pay a premium for. Brand associations directly impact perceived quality and overall value. They also drive market share, pricing acceptance and loyalty. A company known for quality and service can be negatively impacted by associating with a brand that has neither. This is especially true in the business-to-business world. That’s why we recommend a brand audit as part of the due diligence process.

Why we recommend brand audits

We worked with a client who had recently acquired a specialized oilfield equipment company to complete its technology portfolio. The acquired company had a sound portfolio, but had experienced some catastrophic service and quality failures a few years before the acquisition. Due diligence didn’t expose the true impact of those failures.

Our client was aware of the problems and worked hard to correct them. But they made a costly early mistake. They continued to use the damaged legacy brand. The product line improved, but the company couldn’t overcome headwinds caused by the brand perceptions of past and potential customers. The parent company eventually gained market traction by launching its next-generation products under its own well-regarded brand.

Why GE probably does now, too

When GE bought Lufkin Industries in 2013 for $3.3 billion in cash, Lufkin was the leader in the rod lift market. It used its own steel in its American-made products, and its high quality and great service commanded premium pricing and deep customer loyalty.

To lower costs, GE moved manufacturing overseas. Now Lufkin is associated with foreign-made products and uncertain quality. Disillusioned employees left in droves. Their products could no longer command premium prices. Competitors stole market share, and the company sold this year to KPS Capital Partners for an estimated $200 million. That is some major value destruction. By better understanding why the market valued the Lufkin brand and was willing to pay premium pricing for its products, GE might have implemented a different integration strategy that could have mitigated the negative consequences.