Considering Brand Value: What’s In a Name?

By: Chris Mellen | PJ Patel

What Is a Brand and What Does It Include?

ISO 10668 defines a brand as a:

“marketing-related intangible asset including, but not limited to, names, terms, signs, symbols, logos and designs, or a combination of these, intended to identify goods, services or entities, or a combination of these, creating distinctive images and associations in the minds of stakeholders, thereby generating economic benefits/values.”

A simpler dictionary definition of a brand is “a trademark or distinctive name identifying a product, service, or organization.” Brands identify a business and distinguish a company’s products and services from its competition. The following table lists 26 different types of brand-related assets:

Examples of Brand-Related Assets

  • Advertising Concepts
  • Marketing Strategy
  • Brand Name
  • Packaging
  • Catch Phrase /Tagline
  • Product Warranties
  • Colors
  • Promotion Concepts
  • Common-law Trademarks
  • Public Relations Efforts
  • Contest Formats
  • Registered Trademarks
  • Copyrights
  • Scents
  • Corporate Name & Logo
  • Secondary Trademarks
  • Design
  • Service Marks
  • Formulas
  • Shapes
  • Graphics
  • Sounds
  • Jingles
  • Tastes
  • Labels & Packaging Design
  • Trade Dress

Why Do Brands Get Valued?

Brands are valued for a variety of purposes. One of the most common reasons relates to purchase price accounting in compliance with ASC Topic 805 and/or IFRS 3, which require allocation of the purchase price between tangible assets, identified intangible assets (i.e. brands), and goodwill. Brands may also be valued for tax purposes in connection with intercompany sales of assets and various tax structures, bank financing, litigation, insolvency and liquidation, and licensing and joint venture negotiation purposes. Any brand valuation presents a strategic planning opportunity to understand more about what drives value to the underlying company.

Why Do Brands Have Value?

Brands create and drive value to a company through scalability and an attraction of customers, which allows for premium pricing. It is less expensive for customers to find a company than for a company to find customers. A well-known brand can increase sales and market share by creating product or service awareness and demand. Branded products often command a higher price compared to generic or lesser-known branded products, leading to greater revenue growth, higher profit margins, and fewer price fluctuations. In terms of scalability, one brand can be relied upon for global sales, which is in contrast to relying upon a sales team that must continually grow to increase company revenues.

Valuing a brand, like valuing any intangible asset or an overall business entity, requires both a qualitative and quantitative assessment of the benefits generated. With regard to the qualitative assessment, the appraiser should ask questions such as the following:

  • How long has the brand been in use?
  • Does the brand clearly differentiate the product or service with which it is associated?
  • What is the geographic scope of the brand?
  • How much does the brand facilitate the company’s market penetration? How does it impact the company’s market share?
  • Is the company able to get better pricing on its product or service because of the brand? For example, salt is as commoditized a product as can be, yet Morton Salt sells at a 20 cent premium over other brands.
  • How is the brand impacting the company’s sales and marketing expenses?
  • What are the risks of losing brand value quickly (through bad press/blogs/social media)? Brand values can be volatile and failure risk can be high.
  • How did the brand build its recognition/reputation?
  • How is the brand impacting overall customer behavior?
  • How long is the brand expected to be in use? To what extent is it possible that the brand may have an indefinite life?
  • How well is the brand protected legally (if it is covered under a trademark, product or design patent, unregistered trademark on the basis of use, copyright, etc.)?
  • Has the brand ever been licensed to a third party?
  • How important is the brand relative to the company’s other assets in producing the company’s expected overall cash flows?

How Are Brands Valued?

The income approach – as opposed to a market approach or cost approach – is typically applied when valuing a brand. Three of the most common methods within the income approach are the relief from royalty method, the multi-period excess earnings method, and the with-and-without (or differential value) method.

The relief from royalty (“RFR”) method assumes that a brand is valuable because the owner of the brand avoids the cost of licensing that asset. As such, it assumes that a company would be willing to pay for the right to use an established brand in the sale of similar products or services that it would not otherwise enjoy were it not the owner of the brand. Under the RFR method, an estimate is made as to the appropriate royalty income that would be negotiated in an arm’s-length transaction if the subject brand were licensed from an independent third party. The royalty savings are forecast over the useful life of the brand and then calculated by multiplying a royalty rate,1 expressed as a percentage of revenues (or net operating income), times a determined royalty base (i.e., the applicable level of future revenues or net operating income). The royalty rate is developed from a combination of the market data selected, the qualitative analysis on the brand, and consideration of the company’s profit margins.

The advantages of this method are that it is very intuitive and it relies upon market data for a royalty rate. The disadvantages include the challenges of selecting a sufficient sample size of comparable royalty data with similar terms, understanding what component of the selected royalty rates are attributable to the brand itself, and the fact that small changes in the selected rate can lead to relatively large changes in value.

The multi-period excess earnings method (“MPEEM”) is a form of the income approach and measures economic benefits indirectly by calculating the profit (or cash flow) attributable to the brand after adjusting for appropriate returns on contributory assets. As such, the MPEEM forecasts the revenue and expenses related to the brand, and deducts charges for use of other contributory assets. Contributory assets are the properties (such as working capital, fixed assets, and assembled workforce) that are aiding the subject asset in generating revenue and earnings. This method is typically relied upon if the brand is the primary driver of the underlying company’s cash flow. It is a way to quantify the identifiable nature of the brand, separate from the generic nature of goodwill.

The advantages of this method are that it is not directly reliant upon royalty rate data and, for valuable brands, it is intuitive in that it calculates cash flows attributable to the brand after deducting capital charges for contributory assets. The disadvantages include its relative complexity, and the risk of goodwill being included in the cash flows can overstate the brand value.

The with-and-without methodalso referred to as the differential value method, is less used in practice than the RFR and MPEEM. It calculates the added value of the brand by comparing the added revenue/profits to a generic version. If, for example, the branded product sells for $2.00 and the generic sells for $1.50, the differential of 50 cents per unit is attributed to the brand value.

In conclusion, the process is both qualitative and quantitative, both an art and a science. While there are several ways to value a brand, its value will ultimately depend on the extent to which it improves the revenues, reduces the expenses, and enhances market share of a company; and how it enhances the value of the company’s other assets.

For a more in-depth conversation about how differing valuation methods may impact your business, please feel free to contact one of the professionals listed below or your VRC professional.

1 Sources of royalty rate data include ktMINE, RoyaltySource, MARKABLES, Consor, and RoyaltyStat.