Brand valuation Methodology

Question - If valuing brands is somewhat unreliable, is it worth doing at all?

Answer - Thanks largely to the pioneering evangelising work of Interbrand, brand valuations are becoming increasingly recognised as a means of assessing the intangible brand asset element of "goodwill" on a balance sheet. Regardless of the valuation itself, the process provides excellent management insights for both the brand and the underlying business

Key points

Brand valuation became important in the 1980s when corporate raiders realised that brands were invisible assets that greatly increased the value of the companies they were acquiring. Today, many large companies are worth in excess of 5 times their net assets - the difference being mostly attributed to the value of their intellectual property. Approximately 50% of the value of the Coca-Cola Corporation resides in its Coca-Cola brand which is worth more than US$70 billion. 75% of the value of the Ford Motor Company lies in the Ford brand

Brand valuation is difficult, time-consuming and unreliable, which is to say that valuations of the same brand by different consultancies tend to differ significantly. The same brand could be valued at $1.5 billion by one consultancy, $7.5 billion by the next, and $9.5 billion by the third. Indeed, it was.

This unreliability has traditionally led accounting standards authorities to be cautious of allowing brand valuations onto the balance sheet, except where a brand has actually been purchased, thereby gaining a proven value.

However, whereas brand valuations may not be accepted in their own right by accounting standards authorities, there are backdoor alternatives. Corporations are often required to produce an estimate of goodwill to be included on the balance sheet, and the value of brands held can be included in this goodwill" estimate.

While there are many ways of valuing brands for different purposes, the Interbrand methodology of discounted future profits is now generally recognised as the methodology for evaluating brands for accounting purposes.

In more detail..

Types of valuation

There are a number of bases on which to value a brand, depending on the purpose of the valuation:

market value

brand contribution/profitability

royalty value

price premium

For each of these, a considerable amount of internal accounting & market information needs to be available:

1. brand accounting - the starting point is to structure your management accounts by brand. What are the sales, what are the profits, what tangible & intangible assets are allocated to the brand, & what is the performance forecast for the next few years? Many, if not most, companies will not have this information

2. market environment - if a brand has a value today, how stable is this value? Will changing market conditions impact its value &, if so, in which direction & to what extent?

3. price premium - this could be a calculation of the actual price premium currently charged in the market, or a research programme to ascertain what price premium could be charged if the products/services associated with the brand were to be charged to their full market value

4. legal rights - is the ownership of the brand clean? In which categories in which markets is the brand registered? Is the trademark disputed in any markets? Does the business own the Internet domain name?

At the basis of most valuations is the question "How much more profit will I make from buying or licensing this brand than if I were to build my own brand?" The core technique for valuation is therefore a discounted cash flow chart that measures estimated net present value over a specified number of years.

The Interbrand methodologyThe Interbrand methodology is the most recognised of all methodologies.

Interbrand builds its valuations up from three elements:

1. The Financial Analysis, to establish the on-going profit generation of the business

2. The Market Analysis, to establish the extent to which the brand contributes to those profits. Just because a brand appears on a tin does not mean that people buy this tin because of this brand

3. The Brand Analysis, to establish the on-going strength of the brand, and therefore a risk discount factor

To read Interbrand's own explanation of its 2006 methodology, click here.

To view the values of the top global brands, as assessed by Interbrand, click here.

Is it worth it?Whilst going through the brand valuation process is painful, several organisations have reported that it is well worth doing it occasionally, if only to demonstrate to the business the full extent of the assets it owns, & the need to manage them properly.

How many other assets does a company own which are valued in their US$ billions, & yet they do not appear in the accounts & no manager is responsible for them?