blackstroke

28/12/2015

Brand valuation is a domain of branding that is marred by inconsistencies and controversies. Every year, respected global publications come out with rankings of top brands in the world by their intangible assets (brand) valuation. Almost every year, after these rankings are made public, debates arise as to why the rankings of the top brands differ in the different publications and why their valuations also differ. This phenomenon characterises the complex nature of brand valuation as a subject and the differences in the existing valuation methodologies that add to this complexity.

Regardless of the controversy and the innumerable debates brand valuation based rankings create every year, it is still an important aspect of branding. Increasingly, valuation is gaining importance in the corporate world as organisations increasingly try to put a financial number to their most important intangible assets, the brands. Brand valuation is a strategic link between strategy, marketing and finance. It provides perspectives and insights on marketing ROI and its impact on the intangible asset base of an organisation. Strategic brand management, in which ROI, revenues and profitability play a crucial role, becomes more effective when valuation is integral to the process.

Recognition of brand valuation as a strategic tool has led to the emergence of numerous valuation approaches over the years. This is an encouraging development from the point of view that the domain now has serious recognition among brand practitioners, marketers, business leaders and regulators/authorities. On the other hand, the alarming fact is that the existence of numerous valuation approaches has created complexity and has caused confusion among brand owners and other stakeholders.

BRAND VALUATION APPROACHES

Brand valuation as a domain has three primary elements that interact and co-exist with each other – approaches, models and providers. The term “approach” is used to define the ways in which an asset can be valued. In this case, the asset in question is the intangible brand asset. Global valuation and standards committees categorize brand valuation models under three different “approaches”:

  1. Cost approach: In models using this approach the brand is valued by taking into account the various cost elements that went into the brand’s development phase (R&D, testing, concept tests, product tests, any form of product improvements etc.)
  2. Market approach: In this approach, more recent investments and transactions in the brand’s lifecycle is considered. Examples of such type of investments / transactions include sales, acquisitions and licensing
  3. Income approach: This approach involves measurement or estimation of future income, cash flows and profits that can be attributed to a brand over the remaining period of its life. The second stage is discounting these future income and profits back to present value (the “Discounted Cash Flow” approach) or multiplied by a capitalization factor (direct capitalization approach)

The income or more specifically the Discounted Cash Flow (DCF) approach is one of the more popular approaches for brand valuation. The global brand consultancy Interbrand, for example, uses this methodology and it is widely accepted by global auditors and tax authorities in many countries and sufficiently reliable for use in financial reporting statements. This helps to account for brand assets on the balance sheets according to US GAAP, IAS and many other country-specific, and widely accepted accounting standards. This approach includes the following three conceptual steps:

Financial analysis: The first step identifies and predicts revenues from intangibles related to individual brands or the entire brand portfolio. The analysis can be divided into segments like types of customers, distribution channels or markets. The intangible earnings then subtract operating costs, a charge for capital employed and taxes. This method is similar to the net Economic Value Added (EVA), which represents the cash flow from an opportunity adjusted for the cost of resources used to generate the cash flow.

Brand contribution: The second step is to assess how much the brand contributes to demand, thereby measuring what the brand contributes above other intangible earnings. Association and preference metrics are the most common factors for determining the proportion of intangible earnings related to the brand. Brand earnings are calculated by multiplying the brand contribution (for example as a percentage or an index factor) by the intangible earnings from the financial analysis.

Brand value: The final step is to calculate the net present value of the expected earnings discounted by a rate which best reflects the risk of the future earnings. The discount rate takes into consideration the strength of the brand. In principle, strong brand equity can accelerate and enhance cash flow and can lead to less volatile and vulnerable cash flow. Since the brand is expected to generate earnings after the periods that can be reliably predicted, an annuity component should also be added to reflect the continuing long-term earnings after the forecast period, which is typically 5 years.

CURRENT TRENDS IN BRAND VALUATION

The brand valuation domain is continuously evolving. But increasingly it is also coming under lots of criticism for the confusion different brand valuation approaches are causing and why a “single valuation number” is not a useful or actionable metric anymore. In spite of this criticism, there are some trends that are worth noting:

  • There has been a sudden surge in the number of valuation firms that have taken birth and the corresponding approaches on offer
  • Brand valuation is not a topic of trepidation anymore but is widely adopted and accepted as a strategic tool in brand management
  • Valuation techniques are becoming sophisticated over time
  • As touched upon previously, brand valuation is increasing cooperation among marketing and corporate finance departments and individuals
  • Some valuation techniques have become more popular than others due to widespread adoption and industry level acceptance (e.g. the DCF approach)
  • Links between brand valuation and financial validity from a corporate finance perspective continues to be weak
  • Approaches and thinking on brand valuation still remains significantly divergent among academics and commercial practitioners
  • Lots of “black box” methods have come up, which has added to the confusion and sceptisism in the domain
  • Adopters and users of brand valuation still do not understand the thinking, the approach and the methodologies well enough
  • Inconsistency in valuation numbers of global brands arrived at by different approaches adds to the uncertainty around approaches and acts as a barrier towards adoption of a globalindustry level standard

The International Organization for Standardization (ISO) has attempted to bring in a set of standards and consistency in the brand valuation domain. In 2007, the ISO set up a task force to draft international standards on brand valuation. After extensive work that lasted for 3 years, the task force completed and released ISO 10668 – Monetary Brand Valuation in 2010. This standard outlines the core principles that should be adopted while valuing a brand. Getting successfully certified by the ISO 10668 is slowly gaining ground and credibility as a respected certification in the brand valuation domain. The ISO 10668 has been developed to cover the different approaches towards brand valuation (cost, market and income) and it also covers valuation done as part of different purposes and objectives, which include:

  • Strategic brand management (brand and marketing budget determination, brand portfolio optimization, brand architecture design and review, brand extension planning, brand innovation portfolio and pipeline)
  • Licensing and joint venture negotiation
  • Accounting and financial reporting
  • Tax planning and compliance
  • Litigation support and dispute resolution
  • Corporate finance and fundraising
  • Strategic implications of brand valuation

Brand valuation has already being recognised and given the credence of being a practice that aids in strategic brand management. But it has clear strategic implications at an organizational level, which can be categorized under three separate areas:

Increasing the value of the company: Brand value is one of the main reasons why the market capitalization often exceeds its book value during mergers, acquisitions, licensing, joint ventures and other commercial and financial negotiations.

Stock market performance: There is a definite linkage between branding, brand equity and shareholder value creation. One definitive metric of illustrating and showcasing brand strength is through valuation. As a leading strategic management consultancy firm IMG has outlined in multiple articles the fact that strong brands outperforming the market on several financial dimensions. Measures of risk determined by volatility and vulnerability of cash flows compared to the market average are also lower for organizations with strong brand portfolios.

Improved financial ratios: The impact of brand performance on financial ratios is significant. More importantly, strong brands demonstrate greater return on equity. Profitability ratios, such as gross profit margin, operating profit margin, net profit margin and return on equity all indicate higher overall performance and greater efficiency in managing assets and liabilities.

The increased focus on brand valuation and its impact on company success have fostered a new important link between the CEO, CFO and the Chief Marketing Officer (CMO) as part of important strategic discussions in the boardroom.

Brand valuation has both medium-term and long-term implications for brand owners and marketers. These implications are both strategic and tactical from the perspective of brand management and can be outlined as below:

Comprehensive measure: A brand value, regardless of the approach by which it has been calculated, is an organizational level measure and is a number that represents the outcome of all brand building efforts.

Validation platform: A brand value is a platform for marketers to justify the expenditure of short term investments on brand building and tactical measures for long-term impact (which is represented by the brand valuation)

Performance evaluation system: Brand valuation trends, or changes, can be incorporated as a metric in the brand’s performance evaluation system. This helps in countering short-term decision making with long-term objectives for the brand

Efficient planning and budgeting: Brand valuation helps in more efficient planning and budgeting processes. It helps in bringing together the thinking and fosters more cooperation between marketers and the finance department. Maximizing brand value can become a key strategic goal for the brand planning process, which becomes consistent with the broader objective of maximizing shareholder value

Transferability: Brand valuation as a process and an outcome is easily transferable between individuals and departments. In short, it is not hostage to corporate attrition and loss of intellectual capital, which are common phenomena. Because of its inherent transferable nature, new employees who join and are responsible for brand building, can become immediately knowledgeable about long-term strategic thinking and how it links to the brand valuation

Comparability: For global firms, brand valuation makes it possible to measure the performance of brand marketers across countries. This is again made possible by the singularity and transferability of the number, which allows for comparability between performances e.g. between a manager responsible for Tide in Egypt to one who is managing the brand in Poland

These implications are strong indicators that brand valuation is increasingly helping in making brand management and brand building activities consistent within the organization and also across markets (when the brand in question is global). It has also influenced the approach of brand building practiced by managers. More coordination with finance is leading to more sharing of information between marketing and finance, which in turn is positively influencing the ability to meet shareholder goals of revenue and profit maximization.

CONCLUSION

The future of brand valuation as a body of practice looks bright and healthy. The increase in the sophistication of valuation of techniques on offer, better academic-corporate cooperation, the emergence of standards (e.g. ISO 10668), higher levels of interest among brand owners and also the application of brand valuation in a wide array of situations has made the practice more relevant, practical and integral to organization’s business processes.

The primary challenge for the brand valuation practice is to reduce complexity and increasingly move towards global, industry level standards. The wide array of brand valuation models on offer need to be harmonized so that brand owners are knowledgeable about what they are buying into. Financial valuation of brands is a strategic endeavour and each and every step of that process needs to be transparent between the brand owner who is getting the brand valued and the consultancy or academic who is doing the valuation. Hence “black box” models should be effectively discouraged.

The debate on the effectiveness of brand valuation primarily stems from the divergent results different approaches come up with when valuing the same set of global brands. The second challenge has been the lack of business actions around the valuation number. Organizations, by integrating valuation as part of their strategic thinking, have gradually but slowly started addressing the actionability aspect.

The divergent nature of results emerging from different approaches still needs addressing. The increasing popularity of the “income based approach” and its recognition by the ISO in its brand valuation standard is an indication that some form of consolidation is happening in the domain. But still a lot needs to be done to make brand valuation more transparent, reduce complexity and ensure higher levels of uptake among brand owners.