Tuesday, August 22, 2017

Brand Valuation Basics


Since the late 1990s, the need to establish dollar valuations for Intellectual Capital Assets has driven the development of a handful of valuation methods. These methods are nearing formal recognition by the Financial Accounting Standards Board (FASB), and are headed toward inclusion in the standard repertoire of the Generally Accepted Accounting Principles (GAAP).

Essentially, there are four approaches to valuing a Brand, and one or more of them may be applicable in any individual instance. The four approaches are:

1) Cost Approaches
2) Market Approaches
3) Income Approaches
4) Brand Strength Assessment Approaches

Which method or methods are the right method(s) to use depends greatly upon the individual situation and the perspective from which the valuation is to be addressed. Invariably, Brands must be looked at from all approaches.

Arguing from Cost

A cost-based approach is the obvious one from the financial and accounting perspectives, given that it complies with standard accounting practices for valuing assets.

This approach is conservative and, importantly, it should be noted, it assumes that the asset in question declines in value from the moment of its acquisition. While it is a useful element in performing a comprehensive Brand Valuation, possibly to set the low-end, its primary use is with traditional, tangible or physical assets. A cost-based approach is not well-suited to set values on intangible assets – which typically do not decline in value from the moment of inception, but rather, when well-managed, actually increase in value with their very use.

The protocol here is to list all the individual costs which can be documented as the expenses incurred in creating the Brand from its earliest inception to its state at the time of valuation.

This method overlooks new, intangible asset value which may have been contributed to the Brand since its inception through Brand-building activities. It also fails to provide any allowance for future replacement costs.

Arguing from Market Value

This approach argues from what the Brand could be sold for in a market. This approach often assumes future benefits and values which are yet to be captured by the Brand.

Brand Valuation against market value is most easily addressed in public companies through the analysis of market capitalization. In this case, the Brand Value is equal to all or some of whatever market capitalization remains after subtracting the book value assets from total market capitalization. In cases where Brands have been carefully developed, the Brand may account for all of the remaining market capitalization.

As well, a market-valued Brand may be benchmarked against another Brand in the same market for which a Brand Valuation has previously been set – possibly in an acquisition where the Brand Value has been recorded on the Balance Sheet as “Goodwill.”

Arguing from Income

This approach identifies “Brand after-tax operating income” to set a value, stating that Brand Value is the ability to produce after-tax income. Various specific methods exist for setting an income-driven valuation, including:

1) Price premium over an unbranded or minimally branded entity in the marketplace.
2) An estimate of an annual royalty rate under a Brand Licensing Agreement.
3) Formal comparison of “Brand after-tax net income” between the target Brand and an unbranded or low-branded marketplace entity in the same category.

Arguing from a Brand Strength Assessment

The most comprehensive approaches are those that argue from an analysis of a set of factors assessing a Brand within its Primary Competitive Set and/or other peer Brands.

These approaches were popularized during the early to mid-1990s by two British concerns, Financial World magazine, and Interbrand, a Brand consultancy based in London.

Interbrand developed a three-year average of after-tax profits to set “Brand profitability” as a single measure, or as a measure to be factored by a Brand Strength Multiple.

British accounting standards are more permissive than those in the U.S., in that they are known for allowing the inclusion of intangible assets on balance sheets so long as the asset may be separately identified. In England, this is true not only for Brands obtained through acquisition, as in the U.S., but also for internally developed Brands.

Setting Brand Value

All of these methods possess their strengths and weaknesses. Increasingly the trend is toward the application of Brand Strength Assessments because they require a thorough Brand Analysis, and then to balance that valuation against the other less-comprehensive approaches to set final Brand Value.

Because the goal is both the ability to capitalize the intangible asset under consideration and set its value as a benchmark against which to measure future Brand-building activities, it is in all parties’ interest to set the least prejudicial value.

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