There are situations in which, instead of a business valuation, a brand valuation is needed; In these cases, it is difficult to define what the brand is, what portion of the cash flows generated by the company are due to the brand or how much a company is valued without its brand. There are different approaches for valuing brands and each has its pros and cons. These approaches fall into two categories of models:
I.- Brand valuation based on market research
These models are based primarily on market research to determine the performance of brands. They measure, among other things, the behavior and attitudes of consumers that have an impact on the economic performance of brands. They attempt to explain, interpret, and measure consumer perceptions that influence buying behavior. This approach generally fails to establish the link between specific marketing indicators and financial performance of brands because the variables analyzed, are not integrated into an economic model and are insufficient to establish the economic value of brands.
II.- Brand valuation based on financial models
Within this category the various existing methodologies try to incorporate the market variables in a financial model that allows measuring the performance of the brand in economic terms. Under this approach there are several methods:
It define the value of a brand as the aggregate of all historical and replacement costs, that has been invested to bring the brand to the current market level (sum of all development costs, marketing, advertising and other communication costs, among others. ). This methodology does not establish the direct correlation between financial investment and value added by the brand; Nor does it incorporate the value of money over time.
This methodology proposes to establish the brand value based on comparing it with other brands. This comparison is particularly difficult because, by definition, brands seek to differentiate and not be comparable with others. Moreover, the creation of value of a brand in the same sectoral category can be different even if many other aspects of business are similar between brands of the same sector. However, this method can be useful for cross-checking with results achieved with other methodologies.
In this method, the value of the brand is calculated as the net present value of the price premiums that a branded product would have on a similar generic product or equivalent. However, the goal of many branded products is to achieve higher levels of demand rather than premiums over price. It is usually difficult to obtain generic product information comparable to the branded product to be valued.
This methodology is based on financial measures provided through market and financial information of the brand to be valued. The Economic Value approach was developed in 1988 and has become the most accepted method in the market for brand valuation. This method is based on the following principles:
A) Principle of Marketing: “Brands work within a business”. Consumer demand translates into purchasing, price and frequency volumes and brands ensure long-term demand through loyalty and product repurchase.
B) Financial Principle: “The net present value of expected future earnings”. The future earnings of a brand are identifiable and are discounted at an appropriate rate that reflects the risk that those gains will be realized.
This methodology is developed in five steps:
1.- Market segmentation
The brand is valued in each market segment and the sum of the valuations of the segments constitutes the total value of the brand.
2.- Financial analysis
The sales revenues and profits of the intangibles generated by the brand in each segment are identified and projected. Intangible gains are defined as brand sales revenue less operating costs, taxes and capital charges.
3.- Demand analysis
It determines the role of the brand in achieving the demand for the products and services offered in the markets in which it operates and determines what proportion of the intangible profits are attributable to the brand, measured by an indicator called ” brand””.
4.- SWOT Analysis
The brand’s competitive strengths and weaknesses are determined to calculate an appropriate discount rate that reflects the risk profile of expected future earnings (this is measured by an indicator called “Brand Strength Score”) that allows the calculation of the Discount rate brand valuation. Establishing this indicator includes an extensive work of competitors analysis, the structure of the brand market, its stability, leadership position, growth trends, geographical coverage and legal protection of the brand, among others.
5.- Calculation of brand value
The value of the brand is calculated as the present value projected intangible gains of the brand, discounted by the Discount rate brand valuation. The Net Present Value of the brand includes both the explicit projection period and the value beyond that period, reflecting the brand’s ability to continue generating future profits.
It is becoming more frequent for companies, the need for valuing brands both from the management point of view and for transactions. The economic value approach is a useful tool in the financial management of brands.
Despite the differences in focus on brand valuation and the difficulty of determining what portion of a company’s cash flows are attributable to the brand, the brand valuation process is very useful for management teams because it helps them to identify and analyze the brand value drivers when comparing them with other brands or companies or as a measure of accomplishment of the company’s goals in a given period of time.
Based on the working paper “Brand valuation, A chapter from brands and branding, An economist book” Interbrand, april, 2004.