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BRAND VALUATION – A COMPARATIVE STUDY OF THE

METHODS ADOPTED BY INTERBRAND, MILLWARD


BROWN AND BRAND FINANCE

TITLE PAGE

Abstract Registration No.: ICBM08109

Title: Brand Valuation – A Comparative Study of the Methods Adopted by Interbrand,


Millward Brown and Brand Finance.

Author: R. Harish

Affiliation: Faculty Member, IBS (Icfai Business School), Bangalore

Contact Details: R. Harish, Faculty Member


IBS (Icfai Business School)
# 19/3, Srinivasa Industrial Estate, Near Metro
Kanakapura Road, Bangalore – 560 062.
Ph: 080-26860100 Extn: 252; Mobile: 0-9880696970
E-mail: harishr58@gmail.com; harish@ibsindia.org

Conference Track: Brand Valuation

Key Words: Brand Valuation, Interbrand, Millward Brown, Brand Finance


BRAND VALUATION – A COMPARATIVE STUDY OF THE
METHODS ADOPTED BY INTERBRAND, MILLWARD
BROWN AND BRAND FINANCE

Synopsis

This paper presents a summarization of the brand valuation methodologies adopted by three
globally renowned consulting firms – Interbrand, Millward Brown and Brand Finance. The
material is presented based on information available from published sources and is meant to
serve as a ready-reference guide to academicians and researchers.

Purpose of the Study

Global brand rankings by Interbrand, Millward Brown and Brand Finance receive wide publicity
in the world press, year after year. However, all the three are commercial consulting firms and
the methods used by them are proprietary. Hence, details of the methodology adopted by them
do not receive much coverage and are not explained clearly and comprehensively by any single
source. This paper attempts to bridge this gap by presenting a simple and systematic
summarization of the brand valuation approaches adopted by the three firms, by putting together
relevant information that is available from various sources in public domain. In effect, the
purpose of this paper is to present a brief description of the brand valuation methodologies
propounded by Interbrand, Millward Brown and Brand Finance, together with a gist of
similarities and differences among them. Evolution of the brand valuation concept, current
accounting treatment and major approaches to brand valuation are covered briefly in the
introductory sections.
Research Methodology

This is not an academic research paper in the conventional sense. It does not present any
literature survey with references. It does not advocate or test any new hypotheses or models. As
mentioned above, it presents a comparative study of the brand valuation methodologies adopted
by three well-regarded brand consulting firms. This paper is documented based on secondary
information and insights available from published sources in public domain, including websites
of the three consulting firms and their publications. A bibliography of the most important sources
is given at the end of this paper. Several figures and exhibits have been taken directly from the
original sources or have been adapted suitably. The sources of such figures and exhibits have
been duly acknowledged. This document is therefore different from what is conventionally
considered as a research paper, as it presents models and methods which are already being
practiced and widely accepted in industry circles.

Brand Valuation – Its Evolution & Current Position

The First Brand Valuation

Brand valuation first came into prominence in 1988 when Ranks Hovis McDougall (RHM) – a
multi-brand company based in the U.K., warded off a hostile takeover bid by Goodman Fielder
Wattie (GFW), based on the argument that GFW’s bid was too low, as it did not consider the
value of its brand portfolio. Interbrand (one of the three firms whose approach to brand valuation
is covered in this paper) valued RHM’s internally generated and externally acquired brands at £
678 million and the same was indicated in the company’s annual report for the year 1988.

Accounting Principles & Brand Valuation

Advertising and marketing expenditure contribute to brand-building, which influences customer


buying behavior long after the specific campaign period. However, based on accounting practice,
such expenditures are written off within a short timeframe, and are not capitalized and carried
forward to be matched against future sales revenues. Thus, the value of in-house brands is not
recognized in conventional accounting practice.

When a company or business is acquired for a price in excess of the value of its tangible assets, it
has been the practice to designate this excess amount under the head “goodwill”, and amortize
the same within a short period after acquisition. The value attributable to brands also forms part
of the “goodwill,” and no cognizance was taken of this value in the long term.

Even as recently as during the late 1980s, many investment analysts still valued companies based
on traditional accounting measures such as balance sheet asset values and earnings per share,
which created severe distortions as was brought to light in the context of valuation of RHM’s
brands by Interbrand. This problem has however now been overcome, as most analysts now
value companies and businesses by discounting free cash flows to a net present value.

The valuation of RHM’s brands and the successful warding off of a low-value takeover bid
raised the issue that brands are protectable and saleable. They are often developed over a period
of decades supported by vast marketing resources, and obviously have an inherent value in them.
However, capitalization of internally generated brands would tantamount to “creative
accounting,” as it leads to resurrection of costs already written off in the profit and loss account.

Current Accounting Treatment

The position was first clarified in the UK through the Financial Reporting Standard 10 (FRS 10),
which came into effect from December 1998. This permitted acquired brands to be carried as
intangible assets and amortized over their useful economic lives (up to 20 years or even more)
from the date of acquisition. The brands were required to be valued independently, based on
discounted cash flows.

Most accounting standards including US GAAP and International Accounting Standards now
permit acquired goodwill/intangible assets (including patents, leases & licensing agreements,
artistic assets such as plays/films, and marketing-related assets such as brands and trademarks) to
be separately recognized on the balance sheet. Thus, global accounting standards have now
widely accepted that acquired brands can be recognized and valued as distinct assets. Supporters
of brand valuation now argue that logically, a statement of brand values for internal brands too
may be added as an adjunct to the balance sheet.

Applications of Brand Valuation

Brand valuation has a variety of uses – planning and negotiation of mergers & acquisitions,
balance sheet reporting of acquired brands, internal communications and marketing management,
allocation of marketing budget, licensing and franchising, external investor relations, securitized
borrowing, litigation support, trading-related investigations, etc.

Brand Valuation Methodology – Major Approaches

There are in essence four approaches to brand valuation, and these are described briefly below.
These approaches are also broadly applicable to the valuation of other intangible assets.

1. Cost-based valuation: This method is based on what it actually cost to create the brand
(historical cost) or what it might cost to re-create the brand at present (net current
replacement value) with equivalent consumer appeal and commercial utility, minus
allowance for impairment or depreciation. The cost elements to be included in such
valuation would encompass cost towards registration of brand name, research &
development of the product & packaging, and part of the advertising and promotional
expenditure, which creates long-term brand value. However, neither of these (i.e.,
historical cost and net current replacement cost) might correctly reflect the actual current
value of the brand, as they fail to account for the economic benefit of the brand to the
owner. There might be very little correlation between the development costs and the
impact on revenues and profits, thereby significantly underestimating the price at which
the brand might change hands in an arm’s length transaction.
2. Market-based valuation: Here, information on actual sale prices of comparable brands
would be used for valuing a brand. Hence, this is also known as sales comparison
method. However, each brand and its context are unique. It would therefore be difficult to
find market transactions that are strictly comparable. Nonetheless, available market
transaction data could serve as a cross-check on brand valuation carried out through other
methods, which are explained below.

3. Royalty relief method: This approach is based on the premise that if a brand is to be
licensed from another party, a royalty would have to be paid on the turnover, for using
the brand. By owning the brand, payment of royalty is avoided. This method involves
estimating sales for future years, calculating a stream of notional brand royalties based on
an appropriate royalty rate, and discounting the same to a net present value – which is the
brand value. In effect, the value of a brand is estimated as being equivalent to the royalty
that one would have to pay for using the brand as a licensee. Hence, this is called the
royalty relief method or the relief from royalty method.

4. Economic use method: This is the most widely used method of brand valuation, and is
based on the economic value of the brand in its current use to the current owner. It does
not consider the prospective value of the brand for a different user or any hope value to
account for possible new uses for the brand. Here, a stream of future cash flows or net
earnings attributable to the brand (after charging the profits attributable to all other assets
including financial charges and taxes) is discounted to arrive at the brand value. The
earlier practice was to use a multiple of historical brand earnings. For many years,
‘Financial World’, a US financial analysis magazine, published an annual estimate of
brand values based on this approach. It is however much more common now to estimate
brand values by discounting projected future brand earnings, by using an appropriate
discount rate.

In theory, one should estimate the actual excess cash flow attributable to the branded
product as opposed to an equivalent generic product. However, as this is difficult to
estimate, an adjusted profit figure is used as a surrogate for the cash flow premium
commanded by the brand. Usually, such valuations are based on a five to ten year
earnings forecast. A lump sum ‘annuity’ is added to the final year’s earnings to account
for the brand’s earnings beyond the forecast period, effectively in perpetuity.

Royalty relief method and economic use method both fall under the broader category of ‘income
approach,’ as both of them begin with a stream of projected net future earnings, and convert the
same to a value estimate, by using a discount rate, which reflects a measure of return on
investment.

Interbrand – The Pioneer in Brand Valuation

Interbrand was founded in London in 1974 in the name of Novamark and has now grown into a
full-service brand consulting firm operating in 25 countries. Interbrand’s “Top 100 Brands”
Report is published annually in the Business Week. The valuation methodology was developed
in 1988 jointly by Interbrand and London Business School, and was revised substantially in
1993.

Interbrand evaluated various alternatives while developing its brand valuation methodology. It
wanted to arrive at a method which considered financial, marketing and legal aspects; followed
basic accounting concepts; facilitated regular and consistent revaluation; and was suitable for
both home-grown and acquired brands. Interbrand’s approach was based on the premise that the
value of a brand was the present worth of the benefits of future ownership.

Interbrand’s method uses available market and financial data and is based on standard formulae
and procedures drawn from marketing and financial theory. The method is therefore
comparatively more transparent. Interbrand’s method is accepted by tax authorities, monopolies
& mergers commissions and judicial courts in many countries including the USA and countries
in Europe. Interbrand’s brand valuation methodology has also been accepted by the world’s
leading auditing firms.
Interbrand’s approach is based on three economic functions of the brand: “1) to create cost
synergies, 2) to generate demand for the products and services, and 3) to secure future demand
and thus reduce operative and financial risks. The method employed to evaluate brands
comprises five steps: segmentation, financial analysis, demand analysis, brand strength analysis,
and, finally, calculation of the net present value of brand earnings.”1 (Refer Exhibit 1)

Exhibit 1: Interbrand’s Approach to Brand Valuation

Segmentation

Consumers’ attitude and purchase behavior towards brands differ across regions
(countries/continents), depending on a variety of local conditions. The overall value of a brand is
therefore determined by initially assessing the value in individual segments comprising of

Financial An
1
“Brand Valuation. The key to unlock the benefits from your brand assets”, Interbrand Zintzmeyer & Lux,
http://www.interbrand.ch/e/pdf/IBZL_Brand_Valuation_e.pdf
comparatively homogeneous customer groups. Valuations at regional market levels are then
aggregated to arrive at the total value.

Exhibit 2: A Simplified Brand Valuation Template – Interbrand Methodology

Previous Years Forecast for Future Years


Year 2003 2004 2005 2006 2007 2008 2009 2010
Branded Revenue 440 480 500 520 550 580 620 650
Operating Costs (357) (390) (407) (423) (447) (472) (503) (528)
EBITA 83 90 94 97 103 108 117 122
Tax (say, 26%) (22) (24) (25) (26) (27) (29) (31) (32)
NOPAT 61 66 69 71 76 79 86 90

Operating Assets/Capital Employed 110 120 130 130 140 150 160 160
Weighted Avg Capital Cost (say, 10%) (11) (12) (13) (13) (14) (15) (16) (16)

Economic Value Added (EVA) 50 54 56 58 62 64 70 74


Brand Earnings (Based on 40% RBI) 23 25 26 28 29

Discount Rate (say, 9%)


Discount Factor 1.09 1.19 1.30 1.41 1.54
Discounted Earnings 21 21 20 20 19

Value Until the Year 2010 101


Terminal Value (Growth = 2%) 277
Net Present Value of Brand Segment 378

Source: “Brand Valuation: The key to unlock the benefits from your brand assets”, Interbrand
Zintzmeyer & Lux, http://interbrand.ch/e/pdf/IBZL_Brand_Valuation_e.pdf

Financial Analysis

The first analytical step is to arrive at the Economic Value Added (EVA), as a path towards
isolating the brand earnings. This analysis is based upon published company annual reports and
analysts reports from organizations such as JP Morgan Chase and Citigroup. As valuation may
be distorted by an unrepresentative profit in the immediate preceding year, a three-year weighted
average of historical profits is used as the base figure for making future projections. Cost of
sales, marketing costs, depreciation, other overheads and central cost allocation are deducted
from the branded revenue to arrive at EBITA (Earnings Before Interest, Tax and Amortization).
Thereafter, the applicable tax is deducted to calculate NOPAT (Net Operating Profit After Tax).
A charge on the total capital employed, based on the weighted average cost of capital (WACC) is
deducted from NOPAT, to arrive at the Economic Value Added (EVA). EVA tells whether or
not the business is earning returns that exceed the cost of capital. The financial figures, right up
to the EVA stage, are projected for a period of five years (Refer Exhibit 2). The EVA thus
calculated includes contributions from various intangibles such as brands, patents, management
strength, R&D, etc.

Demand Analysis

The percentage of the Economic Value Added that is actually attributable to the brand is worked
out through a proprietary analytical framework referred to as “Role of Brand” analysis. The
“Role of Brand Index” (RBI) provides a measure of how the brand influences consumer demand
at the point of purchase. EVA multiplied by RBI gives the “Brand Earnings”, i.e., the earnings
attributable to the brand.

To arrive at the RBI, the factors that influence consumers to purchase (such as quality,
innovation, design, value for money, ease of use, reliability, leadership and product features) are
weighted in terms of their bearing on demand. For each factor, the specific associations with the
brand are calculated, and these are added together to arrive at the Role of Brand Index.

Brand Strength Analysis

The projected brand earnings are required to be discounted to a present value using an
appropriate discount rate. The discount rate is determined by a “Brand Strength Score” (BSS),
which reflects the risk factor, i.e., the risk that the forecast Brand Earnings will actually
materialize. BSS is measured with reference to a notional ideal score of 100. BSS considers
seven parameters (identified by Colin Bates of Hong Kong-based Building Brands Ltd), with
various weightages assigned to each of them (Exhibit 3). However, according to Bates himself,
“this model is not perfect, for example several of the components have a built in preference for
older brands and so may not give adequate recognition to the value of newer brands such as
Amazon or Starbuks.”2 Nonetheless, the methodology is robust and has stood the test of time.
2
Berger James T and Tadzijeva Diana, “Marketing Perspectives on Brand Valuation”, Intellectual Property Today,
http://www.iptoday.com/articles/2008-8-berger.asp
Interbrand designates Brand Strength Scores for individual brands based on information
available from company annual reports and other published materials, supplemented with
inspection visits to distributors and retailers, opinions of managers and customers.

Exhibit 3: Brand Strength Scoring Pattern

Parameters Components Max. Score


1. Leadership Market share & awareness 25
2. Stability Satisfaction & sustained customer loyalty 15
3. Market Market sector growth & industry concentration 10
4. Diversification Geographic & offer-related diversifications 25
5. Profit Trend Consideration & attractiveness over time 10
6. Support Share of advertising & identity 10
7. Protection Date of registration, legal coverage & monitoring 5
BRAND STRENGTH 100

Sources: Ellwood Iain, “The Essential Brand Book”, Kogan Page, London, 2002, p. 209
“Brand Valuation. The key to unlock the benefits from your brand assets”, Interbrand Zintzmeyer & Lux,
http://www.interbrand.ch/e/pdf/IBZL_Brand_Valuation_e.pdf

Net Present Value Calculation

The value of future brand earnings is inversely related to the brand’s risk, which is linked to
brand strength. The Brand Strength Score is converted to brand risk (or more specifically, to the
discount rate) using an S curve (Exhibit 4). The strongest brands are discounted at the risk-free
rate of return applicable to the market, while average-strength brands are discounted at the
industry’s weighted average cost of capital (WACC), and still weaker brands are discounted at
higher rates. The total brand value is arrived at by adding together the individual segment values.
As already referred to, a simplified brand valuation template is presented at Exhibit 2.

Exhibit 4: Brand Strength Score & Discount Rate


Risk-freerate
e.g. 3%

Limitations and Conditions

Interbrand however does not include parent companies (such as Unilever and Procter & Gamble)
iscount Rate)

Discountratefor
and airline companies in its rankings. Further, brands which do not have at least one-third of
their revenue from outside the home country, B2B brands which do not have a market face and
brands with negative EVA are not valued. As already indicated earlier, brands for which

brandearnings
financial and market data are not publicly available are excluded. Some large and well-known
brands such as CNN, Mars, Visa and Wal-Mart do not figure on Interbrand’s annual brand
rankings for one or the other of these reasons.

e.g. 9%
Millward Brown’s BrandZ - Measuring the Brand’s Consumer
Equity

Industry WACC
Millward Brown is a global market research and consulting firm based in London. Its specialist
financial and ROI arm – Millward Brown Optimor announces the annual “BRANDZ™ Top 100
Most Powerful Brands”. The valuation methodology combines financial data analysis with

e.g. 10%
consumer research findings, on the premise that brand value depends on consumer sentiment and
the company’s ability to convert the same into shareholder value.

The consumer research data is drawn from BrandZ, which is claimed to be the world’s largest
storehouse of brand equity data, based on Millward Brown’s annual surveys. Over the years,
Millward Brown has interviewed over one million consumers across 31 countries (including
India) on 50,000 brands. Millward Brown Optimor values only market facing brands (i.e.,
product and service brands that are directly bought by individual and business customers). The
BrandZ ranking lists the top 100 brands from around the world and also the top brands in 16
business categories.

Millward Brown defines brand value as the financial value of a brand, which is the sum total of
all the earnings that the brand is expected to generate. The brands are valued in three steps:

1. Step 1: Intangible Earnings - From the corporate earnings, identify the company’s
intangible earnings and allocate them to individual brands and countries of operation.
This is done with the help of publicly available financial data and projections from
Bloomberg, Datamonitor (www.datamonitor.com) and Millward Brown Optimor’s own
research.
2. Step 2: Brand Contribution - Determine the portion of intangible earnings attributable
to the brand alone (as opposed to other factors such as price and location). This metric,
called Brand Contribution, reflects the brand’s share of earnings from its most loyal
customers, whose purchase decision is determined by the brand’s promise rather than by
its specific product features. Brand Contribution is indicated on a scale of 1 to 5, where 5
indicates strongest Brand Contribution. This is arrived at based on primary research data
from the BrandZ database.
3. Step 3: Brand Multiple - Project the brand value using a brand multiple. This is based
on market valuations, the brand’s risk profile, growth potential and Voltage™ as
measured by Millward Brown’s BrandDynamics™ (explained later below). The data
required for this step are sourced from Bloomberg, BrandZ database and Millward Brown
Optimor’s own research.
The BrandZ brand valuation study is being carried out each year by Millward Brown on behalf
of the advertising conglomerate WPP since 1998. Findings from The BrandZ Top 100 Report are
being published in the Financial Times since 2006. The BrandZ field survey data is collected by
interviewing consumers about brands belonging to the product/service categories in which they
shop regularly. Respondents are asked to recall all the brands that they know in a given category
and evaluate them competitively.

Two unique e features of the BrandZ approach are that it considers a brand’s short term (1-year)
growth prospects in calculating brand value, and it also covers strong brands which operate in
just a single country. BrandZ also covers retailer brands, which are overlooked by some of the
others. Sector-wise rankings are also provided, so that companies can readily compare their own
brands with those of competitors.

Apart from brand value, one more metric – Brand Momentum, is also calculated. This is an
index of the brand’s short term growth rate (on a ten point scale) in comparison with the short
term growth rate of all brands in the BrandZ ranking.

BrandDynamics™

Millward Brown’s proprietary tool called BrandDynamics™ measures a brand’s consumer


equity, i.e., consumers’ predisposition to purchase a brand, as distinct from other factors such as
patents, production efficiencies, distribution strengths, etc., which contribute to a brand’s
financial equity. The BrandDynamics™ Pyramid (Exhibit 5) depicts the strength of relationship
consumers have with the brand. The Pyramid is constructed for the brand, based on consumer
interviews. Each interviewee is assigned to one of the levels in the pyramid depending on his/her
responses to a set of questions. The Pyramid indicates as to how many consumers have a
relationship with the brand at five key stages. The five stages in increasing order of relationship
with the brand are:

1. Presence – Active awareness based on past trial or knowledge of brand promise


2. Relevance – Relevant to consumer’s needs, in the right price range or in the consideration
set
3. Performance – Felt to deliver acceptable product performance and is on the consumer’s
short-list
4. Advantage – Felt to have emotional or rational advantage over other brands in the
category
5. Bonding – Rational and emotional attachments to the brand to the exclusion of most other
brands.3
It has been validated that brand loyalty is progressively higher among consumers who are in the
higher levels of the Pyramid, and that consumers in the ‘Bonding’ level contribute the most to
the brand’s revenue. They spend more of their category expenditure on the given brand.

Exhibit 5: Millward Brown’s BrandDynamics Pyramid

Strong relationsh
High share
The shape of the BrandDynamics™ Pyramid would vary across brands depending on the

of category expend
percentage of consumers who are at each level of the Pyramid. Data from this analysis is used to
calculate the BrandVoltage™ score, which is an indicator of the brand’s future growth potential.
The BrandDynamics™ and BrandVoltage™ results determine the brand multiple, which is used
in valuing the brand.
3
“What is the BrandDynamics Pyramid?”, http://www.brandz.com/output/Branddynamicspyramid.aspx
Brand Finance – Royalty Relief Method

Brand Finance plc was founded in the UK in 1996, and is an independent consulting firm
engaged in the valuation of businesses and intangible assets of all kinds, particularly for financial
reporting, transactions support and tax planning & compliance purposes.

Brand Finance adopts the ‘relief from royalty’ approach for valuing brands, which calculates the
royalty that a company would have paid for licensing its brand from a third party, in case it did
not own the same. The net present value of the projected royalty stream represents the brand
value. Brand Finance states that it prefers the royalty relief method because this is favoured by
tax authorities and courts, as it arrives at brand values by reference to documented, third party
transactions. Also, this method can be applied by using publicly available financial information
(including company annual reports, syndicated market research, analysts briefings, press reports,
etc.)

In India, for example, Brand Finance values the brand names of only those companies which are
listed on the Bombay Stock Exchange, so that annual accounts are readily available. Further,
only customer facing corporate brands are valued. It is not possible to value the numerous brands
belonging to companies such as Hindustan Unilever, because revenue streams of individual
brands are not publicly available.

The brand valuation process comprises of the following steps (refer flow chart in Exhibit 6):

1. Arrive at Brand Forecasts based on financial analysis (to calculate brand business
earnings) and market analysis (to factor-in market and competitive conditions)
2. Calculate the Economic Value Added by separating out earnings attributable to other
factors.
3. Extract the Brand Value Added from the above through an analysis of the demand
drivers.
4. Carry out a risk analysis (βrand βeta® Analysis) to arrive at the Discount Rate
5. Calculate the Brand Value

Exhibit 6: Snapshot of Brand Finance’s Valuation Framework

Market
Data
Brand Forecasts

Based on financial and market data, a five to ten year cash flow forecast is made for the business
related to the brand that is being valued.

Economic Value Added

In order to avoid overvaluing the brand, it is important to consider only the economic value
added, which reflects the fully absorbed earnings of the brand. Firstly, the cash flow stream that
is used should exclude earnings from the sale of unbranded goods or sale of products under other
brand names, if any. Thereafter, from the cash flow attributable to the brand’s business, a fair
return has to be provided to all fixed assets and working capital used in the business. It is also

Brand Fo
important to provide for taxation. The Economic Value Added, thus arrived at, reflects residual
earnings related to the brand’s business that is attributable to intangible assets, one of which is
the brand to be valued.

Brand Value Added

In this step, one estimates the contribution made by the brand to Economic Value Added,
through Brand Value Added BVA™ Analysis. The objective is to estimate the extent to which
the brand stimulates demand and supports the price. This analysis is based on a large sample
customer trade-off survey or conjoint analysis. Importance of the brand to the purchase decision
is estimated through consumer research at various levels – tradeoff of one brand over another,
one time period over another, one sub-segment of consumers to another and one product class to
another. Thus, this approach tracks the changing importance of various drivers in specific
markets, thereby guiding in resource allocation towards difficult demand drivers and also
tracking the impact of such resource allocations.

At this stage it may be pointed out that in the case of international brands, the brand is valued
separately in various regions based on local business volumes and corresponding demand
drivers, and these are aggregated to arrive at the global value of the brand.

The Brand Value Added is computed by applying the Brand Value Added BVA™ index to the
Economic Value Added.

Brand Risk Analysis

While Brand Value Added reflects the brand’s potential to generate income, it is also important
to consider the likelihood that it will do so, through a suitable discount rate that would take into
account economic, market and brand risks.

This begins with the risk free borrowing rate prevailing in the applicable geographic market,
which is then adjusted to include an equity risk premium. This reflects the expected average
returns for equity investors in the relevant market. This composite discount rate is thereafter
adjusted for the risk pertaining to the business sector in which the brand operates. This is then
further increased or decreased based on the risk profile of the specific brand to be valued.

This last step is carried out based on βrand βeta® Analysis, which scores the brand on ten
objectively verifiable indicators of brand performance relative to other brands in the category
(Refer Exhibit 7). The βrand βeta® score determines the extent to which the discount rate for the
specific brand should be above or below the average for the relevant industry category and
geographic market. The βrand βeta® rating determines the rate of return to be used in brand
valuation. A βrand βeta® score of 50 attracts the average composite discount rate applicable to
the industry sector and geographic market under consideration. A brand achieving a score of 100
is discounted at the risk free rate, as it is theoretically risk free. A βrand βeta® score of 0 attracts
the highest discount rate of risk free rate + two times the equity risk premium (Refer Exhibit 8).

Exhibit 7: βrand βeta® Scoring Proforma

Attribute Score
1. Time in market (0-10)
2. Distribution (0-10)
3. Market share (0-10)
4. Market position (0-10)
5. Sales growth rate (0-10)
6. Price premium (0-10)
7. Elasticity of price (0-10)
8. Marketing spend/support (0-10)
9. Advertising awareness (0-10)
10. Brand awareness (0-10)
TOTAL (0-100)
© Brand Finance plc.
Source: ‘Understanding the Financial Value of Brands’ Report prepared for the European
Association of Advertising Agencies by Brand Finance plc, June 1999

Exhibit 8: βrand βeta® Axis, βrand βeta® Score, Brand Rating & Discount Rate
βrand
Brand Discount
βeta®
Rating Rate %
Score

91-100
81-90
71-80
AAA
AA
A
D: U 10
12
8

61-70 BBB 14
51-60 BB 16

RiskFreeReturn
41-50 B 18
31-40 CCC 20
21-30 CC 22
11-20 C 23

+TwiceEquity 0-10 D 24

RiskPremium 24.
Source: Adapted from ‘Understanding the Financial Value of Brands’ Report prepared for the
European Association of Advertising Agencies by Brand Finance plc, June 1999

Brand Valuation

Finally, the brand value is calculated by applying the identified discount rate to the projected
ount Rate %
future brand cash flows. A simplified numerical example is shown in the Brand Valuation
Template in Exhibit 9.

Exhibit 9: Brand Valuation Template – Brand Finance’s Discounted Future Earnings


Method
22.0
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Net Sales 500 520 550 580 620 650
Operating Earnings 75.0 78.0 82.5 87.0 93.0 97.5

20.0
Tangible Capital Employed 250 260 275 290 310 325
Charge for Capital @ 5 % 12.5 13.0 13.8 14.5 15.5 16.3

Economic Value Added (BVA) 62.5 65.0 68.8 72.5 77.5 81.3
BVA Index @ 75% 46.9 48.8 51.6 54.4 58.1 60.9
Tax Rate 33% 33% 33% 33% 33% 33%
Tax 15.5 16.1 17.0 17.9 19.2 20.1
Post Tax BVA 31.4 32.7 34.5 36.4 38.9 40.8
Discount Rate 15%
Discount Factor 1.0 1.15 1.32 1.52 1.75 2.01
Discounted Cash Flow 31.4 28.4 26.1 24.0 22.3 20.3

Value to Year 5 152.4


Annuity 135.3
Brand Value 287.8
Source: ‘Understanding the Financial Value of Brands’ Report prepared for the European
Association of Advertising Agencies by Brand Finance plc, June 1999

Conclusion – A Comparative Analysis

All the three firms – Interbrand, Millward Brown and Brand Finance, use the income-based
approach to brand valuation, i.e., projecting future income from the brand and converting the
same to a present value. However, Interbrand and Millward Brown adopt the economic use
method, while Brand Finance adopts the relief from royalty method.

Interbrand and Brand Finance use a discount rate to compute the present value of projected
future brand earnings. Millward Brown on the other hand uses a brand multiple.

The sequence of steps adopted by Interbrand and Brand Finance are quite similar. Both of them
use available financial and market data to compute the Economic Value Added (EVA). While
Interbrand extracts Brand Earnings from EVA through multiplication by the Role of Brand
Index; Brand Finance does the same with the help of Brand Value Added Index. In the case of
Interbrand, the risk associated with the earnings and hence the discount rate, is computed with
the help of Brand Strength Score. Brand Finance does the same using βrand βeta® Score.

The difference is that in the case of Interbrand, both Role of Brand Index and Brand Strength
Score are computed largely based on secondary data and information. In the case of Brand
Finance, Brand Value Added Index is computed with the help of consumer research, whereas
βrand βeta® Score is arrived at based on secondary information.
Among the three methods studied in this paper, Millward Brown’s approach is based to the
highest extent on consumer research. After computation of intangible earnings, further analysis is
done on the basis of “Brand Contribution” and “Brand Multiple”, which are determined by
consumer survey responses.

A criticism against Interbrand is that its approach is limited to valuing large, high-profile brands,
which have multinational operations. Millward Brown’s BrandZ is applied to even
comparatively smaller, low-profile brands operating even in one country.

Interbrand’s method relies to a large extent on available published data and is therefore quite
transparent. Brand Finance uses consumer survey data to a significant extent, while Millward
Brown’s methodology is for the most part driven by consumer research data. While increased
use of consumer research is claimed to provide a more practical dimension, at the same time, the
methodology becomes less transparent.

This paper has provided only a brief description and comparison of the brand valuation
methodologies adopted by three consulting firms. There are many more competing approaches to
brand valuation such as Young & Rubicam’s BrandAsset™Valuator, BBDO’s Brand Equity
Evaluation System (BEES), Winning B®ands™ from ACNielsen, David Aaker’s Brand Equity
Ten model, Ipsos’ Equity Builder Model, Research International’s Equity Engine Model, SDR
Consulting’s Brand Value Model and M/A/R/C Research’s BrandLink Model, to name just the
better known ones.

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