Drishti Jain

MSc Finance, London School of Economics & Political Science

Brand valuation plays a significant role in mergers and acquisitions. Potential acquirers of branded companies, increasingly use brand valuations to provide comfort that the price being paid for a company can be substantiated by reference to the value of specific intangible assets as well as the tangible assets being acquired.

“Intangible assets are recognized as highly valued properties. Arguably the most valuable
but least understood intangible assets are brands”
ISO 10668 Brand Valuation – Requirements for monetary brand valuation

The ISO 10668 standard defines brands as “marketing-related intangible assets including, but not limited to, names, terms, signs, symbols, logos, designs, or a combination of these, intended to identify goods, services and/or entities creating distinctive image and associations in the minds of stakeholders, generating economic benefits/values”.

The process of brand valuation determines the economic (monetary) value of a brand. In economic terms, brands affect the demand and supply curves, and therefore create value. Looking at the demand side, a ‘branded’ product can be sold at a higher price, given a sales volume; while on the supply side, brands have the capacity to reduce operating costs and achieve economies of scale.

The origin of brand valuation dates back to the late 1980s when, during a series of acquisitions, it was revealed that the acquisition prices for strong brand companies were consistently higher than the value of their net intangible assets. Goodwill is the difference between market value and book value and includes various intangible assets, of which brand
is a major factor. (Salinas, 2011)

Applications of Brand Valuation

The two general categories of application of brand valuation are (Salinas & Ambler, 2009) :

• Technical valuations are undertaken for accounting, transactional and litigation purposes. These are done for annual reports, tax planning, litigation support, testing impairment, securitization, mergers and acquisitions. This valuation establishes the financial market value of the brand at a given point in time. For example, when a branded company is being acquired, an independent valuer values the tangible as well as intangible assets, including brands, of the entity being acquired. This process is called commercial due diligence and is required to verify the acquired assets’ economic value, and to substantiate negotiations of transaction terms.

• Managerial brand valuations are required for restructuring portfolio management, marketing strategy, marketing budget allocation and performance assessment. They are based on dynamic business models and on the role played by the brand in the model’s key variables.

Approaches and Methods to Brand Valuation

In this section, we briefly discuss the approaches to brand valuation and the general methods used within each approach (Salinas, 2011) :

Cost Approach:
Under this approach, the cost of developing a brand (brand acquisition, creation, or maintenance) including its phases of development (testing, R&D, product improvements, promotions) is considered for brand valuation. The methods used under this approach are:

• Historical cost of creation
• Replacement cost
• Reproduction/recreation/replication cost
• Capitalization of brand-attributable expenses

Market Approach:
This approach uses data from recent comparable transactions involving similar brands. The methods under this approach are:

• Sales transactions comparison
• Royalty savings

Income Approach:
This approach uses the future income, profits or cash flows attributable to a brand to derive its brand value by discounting (using Discounted Cash Flow – DCF approach) or capitalizing them to present value. The most prevalent methods under this approach are:

• Price premium – Cojoint analysis; Hedonic analysis
• Royalty savings – Brand strength and market comparables method; Excess margin; The Knoppe formula; Cluster or group analysis; Other: Kleineidam, Kuebart and Contractor benchmarks
• Demand drivers/ brand strength analysis
• Comparison of gross margin
• Comparison of operating profit
• Comparison with theoretical profits of a generic product
• Cash flow or income differential with a benchmark company (“subtraction approach”)
• Incremental cash flow (“value of the company with and without the brand”)
• Free cash flow less required return on tangible assets
• Excess earnings
• Firm value less value of net tangible assets
• Real options

REFERENCES

Salinas, G., 2011. The International Brand Valuation Manual: A complete overview and
analysis of brand valuation techniques, methodologies and applications. s.l.:John Wiley &
Sons.

Salinas, G. & Ambler, T., 2009. A taxonomy of brand valuation practice: Methodologies and
purposes. Jounal of Brand Management, 17(I), pp. 39-61.