Brand Valuation

Brand Valuation

Agenda Introduction & evidence of brand valuation. Brands on the balance sheet. Social value of brands. Approaches to brand valuation. Calculating a brands value. Five steps to brand valuation. Applications of brand valuation

Introduction & evidence of brand valuation •Initially tangible assets were regarded as the main source of business value •The market was aware of intangibles, but their specific value remained unclear and was not specifically quantified •Brands, technology, patents and employees were always at the heart of corporate success, but rarely explicitly valued.

Introduction & evidence of brand valuation The increasing recognition of the value of intangibles came with the continuous increase in the gap between companies’ book values and their stock market valuations, as well as sharp increases in premiums above the stock market value that were paid in mergers and acquisitions in the late 1980s.

Introduction & evidence of brand valuation 

Why are brands valuable?

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Why are brands valued?

Brands on the balance sheet •The wave of brand acquisitions in the late 1980s resulted in large amounts of goodwill that most accounting standards could not deal with in an economically sensible way. •Accounting practice for so-called goodwill did not deal with the increasing importance of intangible assets.

Brands the balance sheet TRADITIONAL VIEW •The traditional view is that any valuation figure, other than one supported by a specific purchase price on change of ownership is too arbitrary at all to be credible. •The balance sheet is not intended as a statement of corporate worth and that subsequently, inclusion of values of brands in fixed assets would mislead the figures in the balance sheet.

Social value of brands •Do brands create value for anyone other than their owners? •Is the value they create at the expense of society at large?

Social value of brands Brands are accused of stifling competition and tarnishing the virtues of the capitalist system by encouraging monopoly and limiting consumer choice. The opposing argument is that brands create substantial social as well as economic value as a result of increased competition, improved product performance and the pressure on brand owners to behave in socially responsible ways.

Social value of brands Competition on the basis of performance as well as price, which is the nature of brand competition, fosters product development and improvement.

Approaches to brand valuation 

Research based approaches 

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Financially driven approaches 

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Use of consumer research Cost based approach

Premium price 

NPV of a future price premium that a brand would command

Calculating a brands value Discounted cash flow: A classic approach to the financial evaluation of any investment whether material or intangible. This is the model-type for evaluation by means of discounted net anticipated cash flows.

Value of a brand N=

∑ RBt / (1+r)t + residual value/(1+r)n

t = 1 = Anticipated revenue in year t, attributable to the brand r = discounting rate Residual value beyond year n RBn/r or RBn/r-g g= Rate of revenue growth

Multiple methods Firm : P/E

Brand Multiple

Market value of equity

=

Known profits

=

Brand equity Brand net profits

Stages to determine Brand Multiple

Deciding the applicable net profit  

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Use of profit for 3 previous years Discounting the profits to take inflation into consideration Weighted average of the profits takes account of least and most representative years Weighted average of the post –tax net profit attributable to the brand forms the basis of all calculations

Assessing the brands strength 

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Overall marking based upon a set of marketing and strategic criteria Weighted sum of individual marks of each factor determines the overall marks

Deciding the multiple 

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A relation has to be established between the multiple and brand strength The multiple is the indication of confidence in the brand in future The relation is indicated by a brand strength score S-curve is the chart linking multiple with brand strength

Means of evaluating brand strength Evaluation Factor

Maximum Score

Brand A

Brand B

Brand C

Leadership

25

19

19

10

Stability

15

12

9

7

Market

10

7

6

8

Internationally

25

18

5

2

Trend

10

7

5

7

Support

10

8

7

8

Protection

5

5

3

4

Brand strength

100

76

54

46

S-curve

Deciding the brand value

Brand Value = Net brand profit X Relevant brand multiple

5 steps to brand valuation     

Market segmentation Financial analysis Demand analysis Competitive benchmarking Brand value calculation

Applications of brand valuation 

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Brand management and development Bench marking of competitors Monitoring value year on year Brand control Brand licensing Mergers and acquisitions Join-venture negotiations

“If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you.” -John Stuart, Chairman of Quaker (ca. 1900)

Thank