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Valung a Brand

Monday, September 01, 2014

In the past, most companies focused on their tangible assets such as buildings, equipment, receivables, inventory, etc., as composing the value of the business.  Not much attention was paid to intangible assets.  In recent years, this has changed and companies realize that their most important assets consist of their intangible assets such as brands, technology, patents, trademarks, proprietary processes, etc.  Some leading corporate brands today include such companies as Apple, Google, Disney, Coca Cola and Nike to name a few and they are aware of and focus intricately on their brands. 

Brands can be the most important asset a company possesses because of the impact they bring to the company.  The brand influences customers, employees, investors, partners, vendors and regulatory agencies.  This in turn is crucial in increasing profitability for a company and shareholder value.

Valuing a Brand can be complex.  There are a number of different approaches to value that may be used to value a Brand.  Some of the approaches to value include:

  • Replacement Cost Approach
  • Market Approach
  • Income Approach
  • Royalty Approach

The purpose and use of the valuation will determine which approaches to value will be applied.  Each of the approaches to value have advantages and disadvantages.

For instance, the Replacement Cost Approach considers the costs associated with creating the brand or replacing the brand.  This might include the development costs, R&D costs, legal fees, marketing costs, sales costs and other communication costs incurred by the company.  One advantage of this approach is that it provides a more accurate reflection of the true value of the brand.  However, a disadvantage of this approach is that it does not consider the valued added by the actual brand – thus this approach may under capitalize or over capitalize the value of the brand.

Another approach is to use is the market comparisons of similar brands.  The challenge is that comparable brands are difficult if not impossible to find and can easily be differentiated from the subject brand.  They do provide a cross check for the value but should not be solely relied upon in determining the value of a brand.

Under the Income approach, a discounted cash flow analysis may be utilized, which determines the net present value of the forecasted earnings discounted by the brand discount rate.  This calculation comprises the forecasted period and the period beyond that, reflecting that a brand may continue to earn future earnings for an infinite period of time.  This approach is based on the premise that the company would receive a royalty from a third party for the use of the brand as reflected in the projected earnings. 

An advantage to this approach is that the royalty rate determined is based upon the specific industry and thus the overall value determined is industry specific.  A disadvantage of this approach is that determining the appropriate royalty rate to use for a particular brand is very difficult to do and may not be truly comparable which may entail over valuing or under valuing the actual brand of the company.

A brand is typically valued by analyzing the value of the brand from the use of a license of the brand to a third party versus a brand without any license that is just being used for internal purposes. 

The value of a brand is considered to be an intangible asset of the company and is typically included as part of the overall goodwill value of a company.  However, in a few situations, a brand may have discrete intangible asset value and can be separated from the company and sold separately.  This value may need to be determined if the brand were being separated or transferred without the rest of the company.

In today’s market, many companies recognize brands and acquired brands on their balance sheet as a financial performance indicator.  Accounting standards stipulate that the acquired goodwill needs to be capitalized on the balance sheet and amortized according to its useful life.  However, with intangible assets such as brands that may have an infinite life, these assets are not subject to amortization.  Instead, the company has to perform annual impairment tests.  If the value is the same or higher than the initial valuation, the asset value on the balance sheet remains the same.  If the impairment value is lower, then the asset needs to be written down to the lower value. 

 

There are many reasons that a company may determine the value of their brand including:

  • Analyzing the brand value for a merger or acquisition;
  • Analyzing the brand value for a licensing arrangement with a third party;
  • Capitalizing the brand asset as goodwill on the balance sheet and testing for any impairment;
  • Determining the brand value for investment purposes;
  • Analyzing the brand value for financing purposes.

In conclusion, as the digital age continues, brands will continue to serve as an important asset to a company and understanding the value of the brand’s contribution to shareholder value will continue to increase in significance.  Therefore, a company’s brand can serve as a long term competitive advantage as seen by the value of such companies as Coca Cola, McDonalds, Kelloggs, Disney and so on.