A brand is an intangible asset. Some see it as a name and a logo. Others will say that those are just the symbols of what the brand stands for and that what the brand stands for really is the brand. The brand is a covenant with the consumer, a promise that the brand and the products it names will conform to the expectations that have been created over time. A brand exists only because of its commitment to its internal values. Without that commitment, it is nothing but a glorified product name.
Determining the value of a brand is usually a combination of direct and indirect processes. A direct measurement process is one that arrives at a price based on the communication investment made behind the brand. An indirect measurement will value the brand based on what it can add to the bottom line.
Brands are like works of art. They are like the wonderful creations of Pablo Picasso and Rembrandt Harmensz van Rijn. These works of art have a market, but the values at which they change hands are not computed mechanistically.
Why is Brand Valuable?
A brand is a name or a symbol – and it is associated with tangible and emotional attributes – that is intended to identify the goods or services of one seller in order to differentiate them from those of competitors. At the heart of a brand are trademark rights. A brand designates a product or service as being different from competitors’ products and services by signaling certain key values specific to a particular brand.
How did Brand Valuation Originate?
It was the wave of brand acquisitions in the late 1980’s that exposed the hidden value in highly branded companies and brought brand valuation to the fore. Some of these acquisitions included Nestlé buying Rowntree, United Biscuits buying and later selling Keebler, Grand Metropolitan buying Pillsbury and Danone buying Nabisco’s European businesses. All these acquisitions were at high multiple price tags. The amount being paid for the acquisition of a strongly branded company was increasingly higher than the value of the company’s net tangible assets. This resulted in huge levels of ‘goodwill’ arising on acquisition. This ‘goodwill’ actually disguised a mix of intangible assets – brands, copyrights, patents, customer loyalty, distribution contracts, staff knowledge, etc.
Why are Brands Valued?
Companies are increasingly recognizing the importance of brand guardianship and management as key to the successful running of any business. The values associated with the product or services are communicated through the brand to the consumer. Consumers no longer want just a service or product but a relationship based on trust and familiarity. In return businesses will enjoy an earnings stream secured by loyalty of customers who have ‘bought into’ the brand.
Applications of Brand Valuation.
Applications of Brand Valuation
* Brand management and development
* Enhancing management communications
* Benchmarking of competitors
* Monitoring value year on year
* Creating a brand-centric culture
* Internal licensing, brand control and tax planning
* Mergers & Acquisitions
* Joint-venture negotiations
* Expert Witness – evaluating the economic damage of trade mark infringement
* Financing and insolvency- securing funds through identification of value of intangible assets.
* Balance sheet
Methods of Brand Valuation:
1. A direct measurement process
* Discount rate / Net Present Value.
* Awareness Valuation.
* Franchise Valuation methods.
2. An indirect measurement.
* Excess-Earnings Method.
Yet some other methods can be used for Brand Valuation:
1. Financial Analysis – to identify business earnings and ‘Earnings from Intangibles’ for each of the distinct segments being assessed
2. Market Analysis – to measure the role that a brand plays in driving demand for services in the markets in which it operates and hence to determine what proportion of Earnings from Intangibles are attributable to the brand (this is measured by an indicator referred to as the ‘Role of Branding Index’)
3. Brand Analysis – to assess competitive strengths and weaknesses of the brand and hence the security of future earnings expected from that brand (this is measured by an indicator referred to as the ‘Brand Strength Score’)
4. Legal Analysis – to establish that the brand is a true piece of ‘property’
Contribution that brands make to shareholder value.
Several studies have tried to estimate the contribution that brands make to shareholder value. A study by Interbrand in association with JP Morgan (see Table 2.1) concluded that on average brands account for more than one-third of shareholder value. The study reveals that brands create significant value either as consumer or corporate brands or as a combination of both. Table 2.1 shows how big the economic contribution made by brands to companies can be. The McDonald’s brand accounts for more than 70 percent of shareholder value. The Coca-Cola brand alone accounts for 51 percent of the stock market value of the Coca-Cola Company. This is despite the fact that the company owns a large portfolio of other drinks brands such as Sprite and Fanta
Brand Valuation in case of M & A:
Brand valuation provides fair and robust sell or purchase value for brand assets as well as clear identification of the value that brands add to a transaction. Brand valuation assesses not only the current but also the potential value of the brand asset. In many transactions, the brand valuation has identified additional value, thereby significantly enhancing the final sell or purchase price. Brand valuation techniques originally developed in response to mergers and acquisitions activity: valuing the brands owned by a company to help calculate the true value of the business. Since then other applications of brand valuation have developed into important strategic management techniques. Here are the seven key applications of brand valuation:
* External investor relations
* Internal marketing management
* Internal royalty rates
* Licensing and franchising
* Tax planning
* Securitized borrowing
* Litigation support
* Choice of brand after merger
Brand valuation identifies the value of each of the merging parties’ brands to assist management in the choice of the appropriate brand for the merged entity. The choice of the appropriate brand can be based on a clear economic rationale. The year,2005, is the year of the mega merger. From SBC Global’s move to acquire AT&T for US$ 16 billion to P&G’s lunge for Gillette for a record $57 billion, CNN reported that this may be the fourth year in history to have merger and acquisition activity valued over $1 trillion.