Brand value vs brand value

The term brand value can often confuse. Brand value in some contexts can mean the financial value of a brand – its actual value. In other circumstances brand value means one of the intangible measures that contribute to the brand’s financial value. Such brand value attributes can include brand awareness, familiarity, relevance, heritage or understanding. These brand values all contribute towards the financial value of the brand.

An important part of valuing brands is identifying what these values are that drive the brand’s financial value. You could collate an exhaustive list of values but the shorter the list of brand values the easier it is to monitor and manage. The second step when using these brand values to value brands is to calculate how important each one is for the particular brand. For instance, whilst awareness is clearly an important brand value measure, without consumer understanding of what your brand stands for it is wasted. Market research is carried out within defined market segments to determine what brand values are most important to the brand’s customers.

Scoring these brand values helps determine what royalty rate to use when calculating brand value, as part of the relief-from-royalty brand valuation methodology.

How do you value brands?

Every brand is unique. Every brand valuation therefore requires a similarly bespoke approach or brand valuation method. Calculating value is by its very nature subjective, whether business value, property value or brand value. A robust brand valuation aims to eliminate as much subjectivity as possible. This objectivity is achieved by using established, accepted brand valuation methodologies, industry benchmarks and market comparables.

Calculating brand value is similar to valuing business and other asset classes. There are three main ways of calculating brand value:

  • Economic income approach: where a brand is valued using one or more valuation methods that convert anticipated economic benefits into a present single amount, for example the relief-from-royalty brand valuation model using discounted cash flow (DCF) analysis.
  • Market comparable approach: where a brand is valued using one or more valuation methods by comparison with similar assets which have been sold, for example using P/E ratios or turnover multiples.
  • Cost approach: where a brand is valued using the sum of the individual costs or values of the brand assets and liabilities, for example the cost of building or recreating the brand.

The economic income approach is generally the primary brand valuation approach. Within this there are a number of brand valuation models and methodologies used to value brands. The market comparable and cost approaches to valuing brands are generally used to support the income approach. The economic approach uses market benchmarks and data which also make it commercially relevant.

Brand valuation methods

There are a number of different brand valuation methods. There are pros and cons of all these methods of valuing brands. A brand valuation method that is appropriate for one brand may not be the best valuation method for another. Judgement should be exercised to ensure the most appropriate of brand valuation methods is used.

The main brand valuation methodologies are:
1. Income based brand valuation methods

  • Relief from royalty method: this brand valuation method is based on how much the brand owner would have to pay to use its brand if it licensed the brand from a third party. It uses discounted cash flow analysis (DCF) to capitalise future branded cash flows
  • Excess-earnings method: this brand valuation methodology calculates the earnings above the profits required to attract an investor – which uses the estimated rate of return based on the current value of the assets employed. These excess earnings are assumed to be attributable to the intellectual property, or brand.
  • Price premium method: this brand valuation method is based on a capitalisation of future profit stream premiums attributable to a business’ brand above the revenues of a generic business, without a brand.
  • Capitalisation of historic profits method: the brand valuation method is based on the capitalisation of profits earned by the brand.

2. Market based brand valuation methods

  • P/E ratios method: the P/E (price to earnings) brand valuation method multiples the brand’s profits by a multiple derived from similar transactions of profits to price paid based on the value of reported brand values.
  • Turnover multiples method: this brand valuation method multiplies the brand’s turnover by a multiple derived from similar transactions.

3. Cost based brand valuation methods

  • Creation costs method: this brand valuation methodology estimates the amount that has been invested in creating the brand.
  • Replacement value method: this brand valuation method estimates the investment required to build a brand with a similar market position and share.

Which brand valuation method to use?

It is generally best to value brands using all appropriate brand valuation methods and synthesise the results to arrive at a conclusion.

What is brand valuation?

‘What is brand valuation?’ is a frequently asked question. Brand valuation is the process used to calculate the value of brands. Historically, most of a company’s value was in tangible assets such as property, stock, machinery or land. This has now changed and the majority of most company’s value is in intangible assets, such as their brand name or names.

The value of brand has been recognised for over a hundred years. John Stuart, Chairman of Quaker said in about 1900, “If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you.”

However, techniques to quantify brand value have become more sophisticated with the advent of computerised software such as Excel in the mid 1980s. Brand valuations hit the financial headlines when they were tabled to defend Rank Hovis McDougall (RHM) from a hostile takeover from Goodman Fielder Wattie (GFW).

Since 1988, brand valuation methods have improved and consolidated, thanks in part to their acceptance in 2005 under International Financial Reporting Standards (IFRS). IFRS stated that, for the first time, brands and other acquired intangible assets could be reported on a company’s balance sheet.

Brands are valued for many different reasons, such as for legal disputes, strategic management, internal communications, business management, brand securitisation and M&A. Brand valuation models follow standard guidelines. Models for valuing brands follow the same principles of valuation that are used for valuing other tangible assets – economic income approach, market approach and cost approach.

The application of the brand valuation models requires specialist knowledge and experience.

What is a brand?

  • Brands can be defined as trademarks plus associated goodwill. They are a combination of physical, functional and emotional attributes.
    • Physical attributes are elements such as names, colours, logos, typefaces, advertising, packaging, smells, tastes and descriptors.
    • Functional elements include elements such as ensuring recognition, simplifying the selection process, quality conformation or origin guarantee.
    • Emotional elements include associations, self-expression, aspiration and reassurance.

    The combination of these elements generates equity around a trademark which creates the brand. These intangible values can be extremely powerful and consequently extremely valuable. Defining what constitutes a brand or what is required in order for a brand to maintain its value is critical. Every brand valuation starts by defining what the brand is and what it is comprised of.

Valuing brands: the reasons

Valuing brands is done for a number different reasons. Valuing brands enables their owners to understand how brand value is generated and how much brand equity is present. This information can then be used for number of different purposes, including:

  • for financial reporting
  • for disputes such as partnership, licensing or trademark disputes
  • to help influence strategy
  • to monitor return on investment and assist in the allocation of resource
  • to raise finance
  • when they’re insolvent or in administration
  • for M&A
  • for tax purposes
  • to be used as security or collateral

The process of valuing brands is similar for each of these different activities, although there are subtle differences such as the form of presentation and level of detail required. A number of different methodologies are used for valuing brands. Each valuation requires a bespoke approach and different methodologies may be applicable.

 

Source – Brand Valuation