MODULE 10

BRAND VALUATION

A brand is a name or a symbol - and its associated tangible and

emotional attributes - that is intended to identify the goods or services of one
seller in order to differentiate them from those of competitors. At the heart
of a brand are trademark rights.

A brand designates a product or service as being different from

competitors' products and services by signaling certain key values specific to
a particular brand. It is the associations which consumers make with the
brand that establish an emotional and a rational 'pact' between the supplier
and the consumer. This pact is an ongoing relationship between the supplier
and consumer, and because of this, brands provide a security of demand that
the supplier would not enjoy if they did not own the brand. This security of
demand means a security of future brand earnings, and this is what lies at the
heart of brand valuation.

It was the wave of brand acquisitions in the late 1980's that exposed
the hidden value in highly branded companies and brought brand valuation
to the fore. It is thus a marketing measure that reflects the security and
growth prospects of the brand and a financial measure that reflects the
earnings potential of the brand.

Given this concept of economic worth, the value of a brand reflects

not only what earnings it is capable of generating in the future, but also the
likelihood of those earnings actually being realised.

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 Brand valuation and intangible asset valuation can be approached in a
number of possible ways. Intangible Business draws on all available
approaches to brand valuation so that decisions can be made on a more
informed basis. Our general brand valuation approach is to look at intangible
asset valuations on a number of different bases. There are generally three
different approaches to brand valuation: the income brand valuation
approach, the market brand valuation approach and the cost approach to
brand valuation. Other brand valuation methodologies are also used on a
needs specific basis.

Generally we find that an income basis (relief from royalty) drives the
brand valuation with the other approaches to brand valuation used in support
or as sense checks. We therefore normally carry out in depth analysis into:

• Consumer/customer perception compared with competitors

• Market mapping and analysis, size share and growth
• Royalty analysis, supply chain price points and profitability analysis
• Effective financial analysis
• Meaningful benchmarking

Brand valuations are becoming increasingly recognised as a means of

assessing the intangible brand asset element of "goodwill" on a balance
sheet. Regardless of the valuation itself, the process provides excellent
management insights for both the brand and the underlying business.

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 Brand valuation became important in the 1980s when corporate
raiders realised that brands were invisible assets that greatly increased the
value of the companies they were acquiring. Today, many large companies
are worth in excess of 5 times their net assets - the difference being mostly
attributed to the value of their intellectual property. Approximately 50% of
the value of the Coca-Cola Corporation resides in its Coca-Cola ® brand
which is worth more than US$70 billion. 75% of the value of the Ford Motor
Company lies in the Ford brand

Brand valuation is difficult, time-consuming and unreliable, which is

to say that valuations of the same brand by different consultancies tend to
differ significantly. The same brand could be valued at $1.5 billion by one
consultancy, $7.5 billion by the next, and $9.5 billion by the third. Indeed, it
was. This unreliability has traditionally led accounting standards authorities
to be cautious of allowing brand valuations onto the balance sheet, except
where a brand has actually been purchased, thereby gaining a proven value.

However, whereas brand valuations may not be accepted in their own

right by accounting standards authorities, there are backdoor alternatives.
Corporations are often required to produce an estimate of “goodwill” to be
included on the balance sheet, and the value of brands held can be included
in this “goodwill" estimate. While there are many ways of valuing brands for
different purposes, the Interbrand methodology of discounted future profits
is now generally recognised as the methodology for evaluating brands for
accounting purposes.

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Types of valuation

There are a number of bases on which to value a brand, depending on the

purpose of the valuation:

• market value
• brand contribution/profitability
• royalty value
• price premium

For each of these, a considerable amount of internal accounting & market

information needs to be available:

1. Brand accounting - the starting point is to structure your

management accounts by brand. What are the sales, what are the
profits, what tangible & intangible assets are allocated to the brand, &
what is the performance forecast for the next few years? Many, if not
most, companies will not have this information
2. Market environment - if a brand has a value today, how stable is this
value? Will changing market conditions impact its value &, if so, in
which direction & to what extent?
3. price premium - this could be a calculation of the actual price
premium currently charged in the market, or a research programme to
ascertain what price premium could be charged if the
products/services associated with the brand were to be charged to their
full market value
4. Legal rights - is the ownership of the brand “clean”? In which
categories in which markets is the brand registered? Is the trademark

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 disputed in any markets? Does the business own the Internet domain
name?

At the basis of most valuations is the question "How much more profit
will I make from buying or licensing this brand than if I were to build my
own brand?" The core technique for valuation is therefore a discounted cash
flow chart that measures estimated net present value over a specified number
of years.

The Interbrand methodology

The Interbrand methodology is the most recognised of all methodologies.

Interbrand builds its valuations up from three elements:

1. The Financial Analysis, to establish the on-going profit generation of

the business
2. The Market Analysis, to establish the extent to which the brand
contributes to those profits. Just because a brand appears on a tin does
not mean that people buy this tin because of this brand
3. The Brand Analysis, to establish the on-going strength of the brand,
and therefore a risk discount factor.

Whilst going through the brand valuation process is painful, several

organisations have reported that it is well worth doing it occasionally, if only
to demonstrate to the business the full extent of the assets it owns, & the
need to manage them properly.

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