\”Organisations invest in branding not only to extend the market or to increase market share or to charge a higher premium price; but also to attempt to leverage the value of the brand for shareholders. Brands therefore become a source of revenue by attracting investors. Branded companies tend to grow at a faster pace than companies without brands.\”
Brands have long been recognised inside the marketing profession as important intangible assets. Brands can confer considerable advantages, such as building customer loyalty and enabling a price premium for the branded product. As such, the valuation of brands is an important function, to provide tangible, financial evidence of their status as assets.
International Organisation for Standards (ISO) 10668 states that: “Intangible assets are recognised as highly valued properties. Arguably the most valuable but least understood intangible assets are brands.”
The purpose of the Standard is to provide a consistent and reliable approach to brand valuation. To this end it specifies requirements and procedures regarding valuation methodologies, sources of information, and reporting requirements. Although not dealt with in this particular sequence, the Standard provides guidance for the each of the key steps in a valuation.
What is a Brand?
The term ‘brand’ is usually a marketing-related intangible asset that may include logos, names, and terms that are intended to identify products and services. It helps create distinctive images and associations in the minds of consumers and other stakeholders, and consequently may create economic benefits for the owner of the brand.
The term ‘brand’ is used in many instances; it may be referred to as a Trademark, or a bundle of intellectual property rights (IPR) such as formulae, recipes, and design rights.
Purpose of Valuation
Brand valuations can be carried out for a wide range of purposes including strategic planning, financial reporting, dispute resolution, and pre-acquisition due diligence. Value is in the eye of the beholder, so it is essential to determine whether an asset is to be valued from the perspective of a typical purchaser (market value), a specific purchaser (investment value), or an unwilling seller (liquidation value). In most commercial situations market value is the appropriate premise. You would also need to evaluate whether you’re valuing the trademarks, the brand or the branded business – the approach in each case could be very different.
“A brand’s core value lies in its ability to communicate with its stakeholders. This emotional engagement should be measured within each stakeholder group by looking at measures of brand strength such as awareness, relevance, perceptual attributes, knowledge, attitude and loyalty.”
Forbes 2010
Brand Evaluation
As per ISO 10668, each brand is subjected to an analysis on three levels – Legal analysis, Behavioral analysis and Financial Analysis. Keeping in mind that the nature and concept of value is difficult to grasp on account of being subjective in nature, these three methods of analysis objectify the valuing of brands.
Legal Analysis: Legal analysis should be the first area of analysis. Legal analysis draws a distinction between the trademarks, the brands and the intangible assets involved and defines them as separate entities. After the brand valuer has clearly determined the intangible assets and Intellectual Property rights included in the definition of the ‘brand’ in concern, the valuer is required to assess the legal protection afforded to the brand by identifying
- each of the legal rights that protect it
- the legal owner of each relevant legal right and
- the legal parameters influencing negatively or positively the value of the brand.
In general, the most important form of legal protection will be registered trademarks. However, common law rights and copyright might protect certain aspects of a brand.
Extensive Risk analysis and due diligence is required in the legal analysis and the analysis must be segmented by type of IPR, territory and business category. An important component of brand valuation is assessing the legal protection afforded to the brand in each jurisdiction. Legal protection is one factor that contributes to brand valuation because it permits the brand owner to utilise formal legal systems to exclude third parties from using the same brand, thus providing a degree of exclusivity.
Behavioral analysis: Behavioral analysis involves understanding and forming an opinion on likely stakeholder behavior specific to geography, product and customer segments where the brand is operational. This entails examining available market research and benchmarking the brand against its competitors to assess the brand’s strengths and weaknesses.
It is necessary to understand the market size and trends, contribution of the brand to the purchase decision, attitude of all stakeholder groups to the brand and all economic benefits conferred on the branded business by the brand. All valuation approaches require an evaluation of brand strength, the effect of the brand on demand, and the position of the brand in its key markets.
Valuer must also look into why a possible stakeholder would prefer the brand in comparison to that of the competitors’ and the concept of brand strength which is comprised of future sales volumes, revenues and risks. Once such information is gathered and analysed, it is possible to build a financial model to assign numbers to the brand.
For example, one could calculate the brand strength score based on some components that play an important role in the brand’s ability to generate value.
Interbrand identifies 10 factors that contribute to Brand Strength Score. These components are:
Internal: Clarity, Commitment, Governance, Responsiveness and External: Relevance, Differentiation, Authenticity, Engagement, Consistency, Presence
The components almost all pertain to how stakeholders perceive the brand. In other words, brand strength hinges on the nature of the brand / stakeholder relationship—a relationship usually characterized as one of fundamental trust.
Financial Analysis: Financial Analysis is the most frequently used brand valuation method and uses the three valuation approaches – Market, income or cost approach. Each case has to be evaluated on individual merit, based on how much value the strategic buyer can extract from the market as a result of this purchase, and how much of this value the seller will be able to obtain from this strategic buyer. Financial analysis ultimately leads to assessment of cash flows attributable to the brands or the earnings (increase in earnings or savings in costs) that may arise due to the brand.
Valuation of Brands
Brand Valuation is the process used to calculate the value of a brand or the amount of money another party is willing to pay for it or the financial value of the brand. International Organization for Standardization (ISO) came up with ISO 10668 –Brand Valuation, which lays down principles which should be adopted when valuing any brand.
Omnifin – Delivering value beyond the number:
At Omnifin We present a rigorously analyzed and defendable valuation number. Our brand valuation methodology builds a rich understanding of how a brand performs—and should perform—to create economic value. Our insights help organisations on how to increase brand value and, most importantly, the impact of the brand on business results. This means the valuation exercise delivers value to the business far in excess of the valuation number alone.
Strong brands usually enhance business performance by influencing three key stakeholder groups:
- Customers: they influence customer choice, create loyalty and encourage purchase behaviour in their favour.
- Employees: they attract, retain and motivate talent
- Investors: lower the cost of financing
By driving choice and enabling price premiums, brands enable their owners to enjoy higher returns. Strong brands also create continuity of demand, thus making expected returns more likely—or less risky. Brands, in short, create economic value by generating higher returns and growth, and by mitigating risk.
Brand Strength analysis measures the ability of the brand to create continuity of demand into the future and its potential to reduce risk. It takes both “internal” (management and employee) and “external” (customer) factors into account. Finally, these inputs are combined with an in-depth financial model of the business to measure the brand’s current and future ability to create economic value for its owner.
Fundamentally, brand valuation, like any other valuation, is an educated opinion. It is not a price from an actual transaction, but an informed and assessed point of view arrived at by evaluating the brand based on a perception and some structured approach at a specific point in time. There’s absolutely no reason why valuation opinions shouldn’t vary significantly.
There may be three main approaches to valuation of a Brand:
Market Approach
The market approach, also referred to as Sales Comparison Approach, attempts to value the brand in comparison to similar brand(s). This approach requires considers various factors such as operating markets, legal protection, economic environment and relative brand strength. This approach requires a detailed evaluation of the comparability of the two brands, considering factors such as the markets in which they operate, relative brand strength, legal protection, and the economic outlook at the times of the transactions.
Cost Approach
This approach measures the value of a brand based on the cost invested in building the brand, or its replacement or reproduction cost. It is based on the premise that a prudent investor would not pay more for a brand than the cost to replace or reproduce it. The cost approach may not be relied upon to when determining a brand’s value. But it may be used to validate the value as per Income Approach.
Income Approach
The income approach values a brand as the present value of the future earnings that it is expected to generate over its remaining useful economic life. This is a commonly used approach to value businesses and other assets. The valuer would need to carry out an analytical review of the current and potential size of the market in which the brand operates. It is often necessary to separately evaluate all key market segments in which the brand operates, in order to take account of differences in competitive forces and market trends. Specific assumptions that require research and analysis include the brand’s current cash flows, forecast growth (short term and long term), the risk associated with future earnings, the discount rate, the brand’s useful economic life, and tax considerations. The information requirements would vary depending upon the valuation approach and method that have been selected.
The following income based methods may be used to determine the cash flow attributable to a brand.
Price and volume premium methods: The premise of the price premium approach is that a branded product should sell for a premium over a generic product. Or a branded product should be able to sell more product against an unbranded product. This method estimates the value of a brand by reference to the price premium and/ or volume premium that it generates. In situations where a brand yields both a profit and volume premium, both methods should be applied. Consideration should also be given to cost efficiencies resulting from the brand. Ideally, you’d calculate the cash flows (due to price or volume premium and decrease or cost savings) and discount the same to arrive at a present value. This method is similar to With-and-without-method that is used to value non-compete agreements.
Income-split method: This method values the brand as the present value of the portion of economic profit attributable to the brand. Behavioural research is used to determine the brand’s contribution to economic profit.
Multi-period excess earnings method (MEEM): MEEM method values the brand as the present value of the future residual cash flow after deducting returns for all other assets required to operate the business. These models are based on the premise that branded products deliver superior returns, therefore if we value the “excess” returns into the future we would derive a value for the brand. It compares differences in return on investment, return on assets and economic value added between two brands or a branded versus unbranded product.
Incremental cash flow method: This method identifies the cash flow generated by a brand in a business through comparison with a comparable business which does not own a brand.
Royalty relief method: Measures the value of the brand as the present value of notional future royalty payments, assuming that the brand is not owned but licensed.
You need to determine the value driver (percentage of turnover, net sales or another base, or number of units), determine the appropriate royalty rate and determine a growth rate, expected life and discount rate for the brand. Your research (or external databases) may result in a variety and range of appropriate royalty rates and the final royalty rate is decided after looking at the qualitative aspects around the brand, like strength of the brand team and management.
When selecting a royalty rate, you should also consider that when entering a licence arrangement, the royalty rate licensees would be willing to pay depends on their profit levels and the relative contribution of the licensed intangible asset to that profit. For example, a manufacturer of consumer products would not license a tradename at a royalty rate that leads to the manufacturer realising a lower profit selling branded products compared with selling generic products.
This method is widely used for financial reporting and tax valuations as it is aligned with the commercial practice of licensing brands.
The approach for calculating brand value requires first an analysis of financial performance both for a five-year forecast and for beyond, which renders a sum called economic profit. Economic profit is then multiplied by a percentage that represents the “Brand Factor” a reflection of the portion of demand for a branded product or service that exceeds what the demand would be if the product or service were unbranded. The result is called branded earnings. Finally, a discount rate, inversely related to “brand strength,” is determined. This discount rate is used to discount branded earnings back to a present value based on the likelihood that the brand will be able to withstand challenges and deliver the expected earnings (i.e., brand strength). This calculation expresses the value of the brand value in monetary terms.
Accounting Considerations
IAS 38 and Ind AS 38, Intangible assets prohibits the recognition of internally generated brands in the financial statements. Expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognised as intangible assets. Accordingly, though Brands may be valued for marketing or for the purposes of transferring to a third party, they may not be recognised in the financial statements of the entity which has created them.
Income Tax Considerations
Income Tax laws also considers the cost of internally generated Brand as Nil for the purposes of calculating Capital Gains. So, the full value of consideration received from sale of a brand is chargeable to Capital Gains Tax.
Contact for brand evaluations and valuations valuation@omnifinsolutions.com or call +91 8820001234
Download a pdf version of this article
For valuation enquiries call +91 88 2000 1234 or email us at valuation@omnifinsolutions.com