Brand Valuation

Brand value refers to the monetary value that a brand adds to a company or product. Essentially, brand value is a measure of how much a brand contributes to a company’s profitability, and is typically reflected in the price that consumers are willing to pay for a product or service because of the brand’s reputation, quality, and perceived value.

The brand value is not recognized on a company’s balance sheet during its lifecycle because it is an intangible asset, meaning it does not have a physical existence. However, there are certain circumstances where brand value can be recognized on the balance sheet, such as when the company or business is acquired through a merger or acquisition. Moreover, the brand value can only be recognized if it meets certain criteria for recognition under accounting standards, such as being separable from the rest of the company, having a reliable measure of its fair value, and providing future economic benefits to the company. In such cases, the brand value may be recorded as an intangible asset on the balance sheet and amortized over its useful life. In our post, we discuss the three main approaches of brand valuation.

Income-based Approaches

The income-based approach to brand valuation estimates the value of a brand based on its ability to generate future economic benefits. Overall, the income-based approach to brand valuation provides a more comprehensive analysis of the brand’s value by considering the brand’s ability to generate future cash flows. However, it also requires more detailed financial analysis and may be more complex than market-based approaches. There are four income-based approaches to brand valuation.

1-Royalty Relief Method

The royalty relief method, a type of income-based approach, is a widely used method for brand valuation It involves estimating the amount of money a company would have to pay to use the brand if it did not own it. This method considers the licensing fees that would be paid to the owner of the brand. The basis of this method is the Discounted Cashflow Analysis.

Assume that a brand X  generates a revenue of $2.0 million per year. After researching industry benchmarks and recent licensing deals, a royalty fee of 5% is determined. Using a discount rate of 10%, we calculate the present value of the royalty stream over the 5-year amortization period. Tax amortization benefit factor is adjusted in the present value to estimate brand value of $0.34 million.

This method is reliable and widely accepted by accounting and legal professionals. However, it may not take into account the unique aspects of the brand, such as its reputation or customer loyalty.

2-Excess Earnings Method

The excess earnings method is also an income-based approach. This approach calculates the earnings above the required rate of return for such a business. The excess earnings are attributable to the brand and discounted back to estimate the value of the brand.

For example, let’s say Company X has a capital of $10 million. The company is expected to generate cash flows of $3 million for the next 5 years, earning an ROIC of 30%. Let us assume that the hurdle rate for such a project is 15%. This would mean that the $1.5 million is excess cash flow. Using a discount rate of 15%, the brand value is estimated at $5.0 million (the present value of excess cashflows).

This method follows incremental cash flow logic and attributes value to business strategy to brand value. However, this approach ignores the project-specific risk or market situation which may be driving higher profitability for a brand.

3-Price Premium Method

The Price Premium Method is also an income-based approach based on a capitalization of excess cash flows attributable to a business’s brand above the revenues of an unbranded business. Let’s assume that a Brand X has a price i.e. 20% higher than an unbranded product. This 20% premium is expected to result in an excess cash flow of $2 million per year for the next 5 years. Using a discount rate of 10%, the brand value under this method can be estimated at $7.9 million.

This method is simple and widely used. However, a major weakness is that it limits the impact of the brand on price and does not include the impact of volume.

4-Consumer-Based Method

This technique is a newer way of assessing the value of brands. It entails gauging consumer perceptions of the brand, including factors such as its quality, value, and loyalty. The value of the brand is then calculated using a combination of market research and financial analysis. For example, let’s say that we estimate that X’s brand loyalty and premium pricing strategy generate an additional $1 million per year in revenue compared to a generic product. Using a discount rate of 10%, we can estimate the present value of that future income stream over the next 5 years to be approximately $3.8 million. Based on this estimate, we might conclude that X’s brand is worth around $3.8 million using the consumer-based approach.

Based on customer perceptions, this approach provides an exhaustive picture of the brand’s overall worth incorporating both price and volume impacts. However, its implementation can be costly and time-consuming. 

Market-based Approach

This method compares the brand to similar brands in the market. This method involves valuing the brand by examining existing transactions involving similar brands in a similar industry and referring to comparable multiples. In other words, this technique applies the premium (or some other metric) paid for similar brands to estimate the brand value.

Let’s assume that “X” operates in the retail industry, and the average EV/Sales ratio for the generic retail industry is 2.5x. Let’s say a similar brand, Y, was sold at an EV/sales multiple of 3.0x, reflecting a brand premium of 0.5x of sales. If “X” has annual sales of $1 billion, the same premium can be used to estimate brand value for X at $0.5 billion.

Despite being easy to understand and providing a benchmark for the brand, it may not take into account the unique aspects of the brand being valued. Also, it is difficult to specify similar transactions and estimate the brand premium in valuation.

Cost-based Approach

This approach calculates a brand’s value as the sum of all previous costs incurred to bring the brand to its current condition: development costs, marketing costs, advertising, other similar expenditures, and so on. It is often used when a brand is in its early days. For instance, let’s assume there is a brand X that needs to be valued. So far, the following costs have been incurred: development costs of $100,000, marketing costs of $50,000, advertising of $200,000, and licensing and registration costs of $150,000. Based on these inputs, X’s brand value would be $500,000.

Although this method is relatively simple and straightforward, it may not accurately reflect the actual value of the brand. This is because it does not consider the current market conditions, customer perceptions, or competition. Moreover, the buyer would be more concerned about its future cashflows.

Conclusion

The International Financial Reporting Standards (IFRS) do not provide specific guidance on brand valuation techniques. The appropriate valuation technique will depend on the specific circumstances and nature of the brand being valued. Therefore, companies can use any of the brand valuation methods that are commonly accepted and recognized by the industry, as long as they can demonstrate that the method is reliable, consistent, and based on reasonable assumptions.

Platform01 Consulting specializes in brand valuations and can help estimate the value of a brand during the corporate M&A process. Please use the “Schedule Call” link to schedule a discussion or click on the WhatsApp link for an instant discussion.