Brand Valuations

The concept of valuing a brand has been at the heart of what drives value in a company. In the early ’80s 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.

Brand valuations - market to book

The table above shows the S & P index increase in the Market to Book values of firms between the late 1980s 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. Marketers believe that the brand and all its associations (including the organisation’s 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 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…

Brand valuations - finance perspective

The first brand valuation was undertaken in the late ’80s when Nestle put its 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 Reckitt & Colman (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 pathfinding valuations and some emerging issues between the late ’80s and now…

Brand valuations - pathfinders

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) goodwill 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 marketers 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 marketers 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 marketers 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 Brand Valuation Benefits).

Allan Rodrigues of The Business Binnacle is a specialist in all types of brand valuations. You can contact him at allan@theBusinessBinnacle.co.nz [no spam]


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