Valuing a brand
The article below was sourced at Brandvaluation.co.za
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:
Valuing brands for financial reporting
Valuing brands for disputes such as partnership, licensing or trademark disputes
Valuing brands to help influence strategy
Valuing brands to monitor return on investment and assist in the allocation of resource
Valuing brands to raise finance
Valuing brands when they’re insolvent or in administration
Valuing brands for M&A
Valuing brands for tax purposes
Valuing brands 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.
“We frequently refer to ‘brand values’ as if everyone knows what we mean. It is assumed that there is a general understanding that a brand stands for something and what it stands for must have a value. These values can be critically important or small inconsequential things but above all they are the things which give the brand its worth and differentiate it from all others. Through these brand values a product or service is enhanced beyond its functional purpose. In this context the brand provides the consumer with more value and this is why they are prepared to pay a premium to acquire it.” (B2B International)
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The Balance – Article source
A brand can often be seen as something intangible and it’s difficult for people to understand the value that brand brings into a company. It’s important when sitting down to create a brand valuation to determine what your brand includes.
It could include your trademark, logo, packaging, marketing strategy, digital assets, brand colors, etc.
Brand Development and Valuation
Brand development requires money and it’s essential to be able to forecast the value of the brand to executive leadership and investors. Brands help identify and differentiate goods and services from the competition. But how can the value be shown on a balance sheet?
There are various ways to approach the valuation of a brand and many of them are debatable. The concept of value can often be a difficult concept to understand. This is often because value means different things to different people and so it’s not an objective concept, and the valuation is determined by the use of it.
Popular valuation methods and approaches include:
Cost Based Brand Valuation: The brand is valued using the sum of individual costs or values of brand assets and liabilities. It’s the accumulation of the costs that have been incurred to build the brand since inception. Items you would include when evaluating costs include historical advertising, promotion expenditures, the cost of campaign creation, licensing and registration costs. You could use this method whether you have just created a brand or you’ve gone through the process of re-developing the brand.
Using the cost base valuation would require you to evaluate the cost of the brand and restating actual expenditures in current cost terms. The same method could be used if you had just worked to re-develop and launch your brand. One thing to keep in mind, while costs can be collected and used the figure doesn’t necessarily represent the current value of a brand. The brand value using this method is equal to historical or replacing the cost for the brand.
Market-Based Brand Valuation: This brand valuation uses one or more valuation methods by comparing similar brands which have been sold. You would use comparable market transactions like the specific sale of a brand, comparable company transactions, and/or stock market quotations. Think of it like this, market-based brand valuation is that a brand can be sold for. The brand value using this method is equal to market transaction price, bid, or offer for identical or reasonably similar brands.
Income Approach Brand Valuation: This method is often referred to as the “in-use” approach. It considers the valuation of future net earnings that directly attribute to the brand to determine the value of the brand in its current use. The brand value using this method is equal to present value of income, cash flows, or cost savings actually or hypothetically due to the asset.
Brand equity is one of the few assets in the business that can provide a sustainable competitive advantage. As you can see there are many methods that can be used, which means it’s not difficult to manipulate the results of measuring one’s brand equity.
In order to prevent abuse of this, it’s important to identify the objective of the valuation and use the appropriate method and assumptions to determine a fair value.
I think it’s fair to say that brand valuation can really be more of an art than a science, but it can help in identifying and developing the value proposition behind your brand.