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Brand Valuation
Your brand is your most important asset and it should be managed just like any other corporate asset. Strong brands produce a more dependable stream of revenue, profit and cash flow than non-branded equivalent products or services.
The starting point to the brand management process is a brand valuation.
We believe that building a brand is both an art and a science and our consistent and well-proven approach to brand valuation takes this into account, whether we are valuing a brand for marketing, financial or litigation purposes.
Identify the Brand and the components of the brand.
Define the Standard of Value. Fair Market Value, Fair Value, Investment Value, or Intrinsic Value. In most transactions, fair market value is the acceptable definition and is defined as the amount at which an asset would change hands between a willing buyer and a willing seller, in an arm’s length transaction, agreed within a commercially reasonable period of time. It assumes that each party has a reasonable knowledge of the relevant facts, neither being under any compulsion to act. It assumes that equity arises to both parties from the transaction. “Arm’s length” implies that the transaction takes place between unrelated or uncontrolled parties, each acting in its own self-interest. Other standards of value are.
“As of” Date. Intangible value can be fleeting and therefore the ”as of” date for the valuation or analysis of the brand is important.
Segment the Brand.
Create Market Maps.
Determine the Brand’s Value Drivers
Test Financial Forecasts in Relation to the Levers of Financial Value.
Consider, the Cost Approach, Market Approach and Income Approach.
Cost Approach The cost approach is a valuation technique that estimates value based on the cost required to create the item. Under the cost approach, the actual dollars spent to build a brand are analyzed. While it is difficult to isolate and quantify all historic expenditures incurred in building a brand, it may be possible to identify external marketing costs, including media and promotional spending.
This approach can be a highly conservative estimate of the brand value because the cost approach does not factor all costs incurred in building the brand. For example labor costs, other overhead, soft dollar costs, the cost of trademark registration or internal marketing time, just to name a few costs, may not be specifically identifiable and therefore difficult to factor in. Additionally, the historical cost approach does not consider future economic benefits of a branding campaign. As media markets have become more competitive in recent years, the cost of recreating a brand would most likely exceed the historical cost even in real terms. Therefore, the cost approach may be considered as a baseline value of a brand by which to measure future investment.
Market Approach The market approach is a valuation method that estimates value based on actual market transactions. The market approach requires the collection of market data from comparable transactions and analysis of the data to estimate the value of the brand through comparison and correlation. AbsoluteBrand combines information and research from our proprietary databases and external market data. The market approach is helpful in researching for potential licensing transactions.
Income Approach The most accurate valuation of a brand is the present value of the incremental profit attributable to that brand. The income approach is based on the present value of an income stream. This approach to valuation is based on the assumption that if the brand’s underlying product or service did not own its trademarks it would need to license them from a third party trademark owner. Ownership of its trademarks therefore ‘relieves’ it from paying a license fee (the royalty) for the use of the third party trademarks. It requires the development of income stream projections that are then discounted for risk and the time value of money, i.e., “present-valued” as of a certain date.
Under the income approach, a complex model integrates historic and forecast financial results, market risk and brand contribution. The result can be a static brand valuation as of a particular date or it can be transformed into a dynamic brand management model.
A brand valuation under the income approach is comprised of three main variables:
1. Forecast Income Statements from the Branded Business. The valuation model is segmented to reflect the relevant competitive environment within which the brand operates and forecasts are made. This information is gathered through management input and market research information.
2. Royalty. The brand is benchmarked and comparable brand royalty rates are researched and then applied to a forecast revenue streams.
3. Brand Risk Rates. The brand’s contribution to earnings is analyzed to establish the security of future brand earnings using consumer research and competitor review. This approach utilizes sound valuation principles, namely the discounted cash flow analysis along with quantifiable market research and it relies on the forecast amount of operating earnings that are attributable to the brand. The future expected brand earnings are then present-valued using a discount rate that factors in the risks associated with achieving those future brand earnings.