Valuation of brand equity matters to all businesses – how to value it and why protect it.
My first grasp of what brand valuation meant came to me not through a marketer but from a wise accountant.
I was running a marketing services business and we’d had a few good years. Going through my year-end accounts, my accountant asked, “Do you want to be seriously rich?”
“Silly question,” I thought. But he explained: if I was enjoying the day-to-day business, happy to take a good salary and dividends from time to time – then, I would take one route. However, If I wanted to realize some serious wealth from the business I would have to think differently. At some point I would have to look at perhaps selling all or part of the business – perhaps privately or as shares, or maybe a franchise.
If I wanted to take some value out of the business, I would have to think like a buyer and work out where the value lay.
It was not in the fixed assets – as a service company we had virtually no plant, machinery or stock. Current assets would vary. All we had was whatever cash in hand sat in the bank.
He pointed out that an important part of any value would lie in the intangibles. It would be about the name, the reputation – in the brand.
I had been using the brand as a promotional tool, but up to that point had not seen it as an asset.
This is a position many medium size companies are likely to find themselves in. It is only when a business is considered for acquisition that thought is given to the brand and its valuation. However, consideration of the value of brand equity is important for all size businesses, and throughout their progress. It ensures that the owners and managers protect and polish the intangible assets just as they would the tangible ones. Then, should the time come to realize some equity from the business it will be in the best possible position.
Let’s be realistic – for small businesses and those in the early stages of their growth, the real worth of the brand may represent only a very small fraction of the total company worth. However, companies grow: even the biggest brands started small. It’s never too early to think about brand valuation.
How do we value our brand?
As you can imagine there is a good deal of discussion around this tricky subject and there are half a dozen approaches. In practice there are three key approaches but most valuation uses one of three approaches – or often a combination of one or more.
This method includes approaches such as ‘creation cost’ or ‘investment cost’ – calculating the amount that has been invested in bringing the brand to its current market position. On it’s own, this is problematic as it takes no account of value – has the investment been wisely spent? It is also difficult for a new brand which may have had strong fortuitous growth with low cost.
Another approach in this category concerns ‘replacement valuation’ – what would it cost to build a brand to the current position from scratch.
These methods look at comparisons based upon reported values in the marketplace based upon such approaches as P/E multiples or turnover multiples. There are obvious issues here if the brand is innovative where comparisons are difficult. Again there needs to be a good deal of maturity of both the brand and its market sector.
These approaches try to assess the income generated by the intangible assets. There is a good deal of estimation required but if approached rigorously should provide a perspective with some ecological validity.
There is the price premium method which considers the premium the brand can command over an unbranded product.
Royalty relief makes a theoretical assumption that the business does not own the brand and estimates the cost to license the brand from another party.
The excess earnings method looks at the profits over and above accounting for all tangible assets and attributes that excess to the value provided by the brand.
Other methods in this category include income split and incremental cash-flow methods.
Know your value
It may seem like a distant issue, but brand value needs nurturing if one day it is to be realized. It may not appear on your balance sheet yet, but a wise owner should keep an eye on the brand equity and make periodic estimates of its worth.
As John Stuart, Chairman of Quaker said at the beginning of the 20th century –
‘If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trade marks, and I would fare better than you.’