Brand Valuations

BRAND VALUATION

(compiled by Allan Rodrigues of the Business Farm)

The concept of valuing a brand has been at the heart of what drives value in a company. In the early eighties most of the value of the company was represented in its physical assets (e.g. plant machinery etc).

Over the years since then, there has been a steady and inexorable increase in the Market to Book value of companies, most noticeably with companies that operate in the knowledge sector, and those with strong brands.

The table above shows the S & P index increase in the Market to Book values of firms between the late 1980's to date, clearly indicating the shift in value from the tangible to the intangible value of the company.

The intangible value of the company includes the company's architecture, trademarks, brands and branded businesses, management expertise and even the specialised processes, knowledge and abilities of its employees. Of these a company's brands are a major (and in many cases the largest) contributor to the value of the business.

For a marketeer a brand does not just describe what a product or service can do for the customer, but what it means to the customer emotionally. Customer loyalty is created over time, and many touch points of consumer experience. Marketeers believe that the brand and all its associations (including the organisations culture as a whole) contribute to this experience.

Brand Equity is seen to consist of 'Brand Awareness' and Brand Loyalty'. In terms of their impact on share value, brands 'create the demand' and more importantly in later periods 'secure the demand for a sustained period' thereby mitigating the risk of the company's cash flows. 

Historically Accounting and Finance have been far slower to recognise the value of brands (and other intangibles) as assets on the balance sheet, partly because of the difficulty in applying the definition of an asset to brands (or any intangible asset for that matter), partly because the various valuation methods in early use failed to link brand value to the economic value of the firm, and finally because there was no easy and visible method at the time, of separating brand value from the value of other intangibles.

The accounting and finance perspective has always been, and continues to be driven by compliance on the one hand, and economic value (earnings valuations) on the other. From the financial point of view the questions that need answering are shown below:

The first brand valuation was undertaken in the late eighties when Nestle put it's acquisition of Rowntree on its balance sheet. The prevailing rules (and wisdom at the time) was to treat such goodwill obtained from acquisitions as an expense, and to amortise them over the life of the asset (or write them down against reserves thus lowering the share price). Not surprisingly this penalised companies for making value added acquisitions.

Nestle was quickly followed by Ricket Coleman (Airwick) and Grand Metropolitan (Smirnoff) until Rank Hovis McDougall defended a hostile takeover from Goodman Fielder Wattie by valuing its brands (possibly the first time a brand was internally valued). The diagram below shows some of the path finding valuations and some emerging issues between the late eighties and now: 

The accounting and finance profession in the UK, Australia and New Zealand were the first to make provision for brands to be recognised as assets, by introducing (FRS 10 and FRS 11) in 1999. This was followed by the US in 2002 with the introduction of FASB 141 and FASB 142 (although it is expected that most non US accounting rules will follow the US model to adhere to GAAP (generally accepted accounting principles).

The rules effectively were amended to read that (a) good will could be capitalised and amortised over the useful life of the asset (b) That Brands could claim an infinite life and were not subject to amortisation and (c) companies needed to perform 'annual impairment tests' to value the brand and adjust it higher or lower, based on the value obtained.

Over the years there has always been some angst between Marketeers and finance professionals on the methodologies to be used in valuing a brand (as mentioned above). The technical pages on this website (see Brand Valuation Methods and Economic Value Approach) provide some description of the various methods in use earlier in the process, and those that continue to be used currently.

Early valuation methods tended to approach brand value from dense marketing metrics with few linkages to the shareholder valuation techniques used by finance professionals.

Conversely finance professionals who took an 'Earnings Valuation' approach to valuing brands, did not give as much credence (as they should have), to integrating   brand strength, brand management metrics and consumer metrics that marketeers were able to extract from fairly in-depth consumer surveys and studies they conducted.

The current approach by most valuation companies is to correct this failing. Modern valuation methods attempt to seamlessly meld the requirements of marketeers and finance professionals, by using a combination of market based metrics and shareholder valuation approaches, to extract the value of the brand from the other intangibles of the firm. 

As a matter of fact firms tend to use more than one Economic Value Approach to derive their brand value  (out of the several captured on the technical pages of this website).  

Brand Valuations as a Brand Management Tool

The use of brand valuations as a brand management tool  represents an opportunity to a company's senior managers (marketing and finance professionals alike), to measure what drives value in the brand, and how these key drivers of value, impact on the share price of the company.

Consequently Brand Management  techniques that use brand value (economic value approach) as the overarching measure of value, are far superior to the others that do not, and provide a number of benefits in managing the performance of brands (See Benefits - Brand Valuation on this website).

Allan Rodrigues  of The Business Farm is a specialist in Economic Valuations,  Earnings valuations, contingent Claim Valuations and in Brand Management Valuations. He is contactable on allan.rodrigues@thebusinessfarm.com.au