How to do Brand Valuation?
June 25, 2021
The business valuation process is a challenging task. While the valuation of a brand may seem simple and appealing, they offer proper financial techniques, the truth is the bigger a brand is, the more complex and challenging the task of brand valuation is. A lot of factors should be taken into account and the valuation of trademarks, patents, goodwill, etc. also play a major role in the process.
Brand Valuation refers to the process that is used to calculate the value of a brand or the amount of money a third party is willing to pay for it or the financial value of the brand.
COST-BASED APPROACH OF BRAND VALUATION
The techniques under this method are concerned with the costs that are used in creating or replacing the brand. It is further subdivided into the following methods:
- Historical Cost Method - The approach includes the historical cost of making the brand as the actual brand value. It is regularly used on the preliminary levels of brand creation when specific market applications and advantages cannot yet be identified. However, the shortfalls of this approach are that there exist difficulties as to what could classify as marketing costs and the next amortization of marketing cost as a percent of sales over the brand's expected life.
- Replacement Cost Method - This method states that the brand valuation should be done by taking into account all the expenditures and investments that are required to replace the brand with a new one that has equivalent value to the company. The drawback for this method is that though it makes the calculation convenient and easy, however, it looks over the success of an established brand.
- Conversion Model - Using the approach here, one estimates the quantity of awareness that needs to be generated to attain the modern-day level of sales. This technique could be based on conversion models, i.e., taking the level of awareness that induces trial that in addition induces ordinary repurchase. The output so generated may be used for 2 purposes: to decide the cost of obtaining new clients and would be the replacement fee of brand equity. The major flaw in this system is that the differential in the purchase patterns of a generic and a branded product is required and the conversion ratio among awareness and purchase is better for an unbranded generic than the branded product and this indicates that awareness isn't always a key driving force of sales.
- Customer Preference Model - This method proposes that the value of the brand may be calculated through observing the growth in recognition and evaluating it to the corresponding growth in the market proportion. But he had diagnosed the trouble with this being how much of the elevated market share is attributable to the brand's recognition growth and how much to other factors. A further issue is that one might not anticipate a linear function among awareness and marketplace share.
MARKET-BASED APPROACH OF BRAND VALUATION
The market-based method essentially offers the amount at which a brand is bought and is associated with the maximum value that a "willing consumer & seller" are prepared to pay for an asset. This method is most typically used when one needs to sell the brand and consists of methods herein stated:
- Comparable Approach or the Brand Sale Comparison Method - This approach entails the valuation of the brand by observing current transactions concerning similar brands in a similar industry and referring to similar multiples. In other words, this approach takes the premium (or some other measure) that has been paid for similar brands and applies this to brands that the company owns. The benefit of this method is that it appears at a 3rd party angle that is, what the third party is willing to pay and is easy to calculate however the flaw in this approach is that the information for similar brands is rare and the price paid for the same brand consists of the synergies and the specific goals of the buyer and it may not be relevant to the value of the brand at issue.
- Brand Equity based on Equity Evaluation method - Brand equity may be divided into components: The ‘demand enhancing component, which incorporates advertising and results in rate premium profits, The cost-benefit component, which is acquired due to the brand during new product introductions and through economies of scale in distribution. Hence, they essentially anticipated the price of brand equity using the financial market value and the benefit of this method is that it is based on empirical proof however shortfalls of this method are that it assumes a very sturdy state of efficient marketplace hypothesis and that all information is covered in the share price.
- Residual Method - Keller has proposed the valuation of the brand by residual value which might be when the marketplace capitalization is subtracted from the net asset value. It will be the value of the ‘intangibles’ one of which is the brand. Another alternative method that is advised is that of the utilization of real options. The variables that need to be calculated are the risk-free interest rate, implied volatility (variance) of the underlying asset, the modern-day exercise rate, the value of the underlying asset, and the time of expiration of the option. This approach is beneficial in calculating the potential value of line extensions however the inherent assumptions in this method make any practical application hard.
INCOME-BASED APPROACH OF BRAND VALUATION
The income-Based or Economic Use method is the valuation of future net income directly due to the brand to decide the value of the brand in its modern-day use. This approach is extremely effective because it suggests the future ability of a brand that the owner presently enjoys and the value is useful when compared to the open market valuation as the owner can decide the advantage foregone by pursuing the modern course of action. The strategies used under the method are as follows:
- Royalty Relief Method - The Royalty Relief approach is the most popular in practice. It is premised on the royalty that a company would need to pay for using the trademark if they needed to license it. The technique that needs to be observed right here is that the valuer should first decide the underlining base for the calculation (percent of turnover, net sales or another base, or quantity of units), determine the correct royalty rate and determine a growth rate, predicted life and discount price for the brand. This approach has an edge of being industry-specific and accepted by tax authorities however this approach loses out as there are actually few brands that might be genuinely similar and generally the royalty rate encompasses more than just the brand.
- The differential of Price to sale ratios approach - The Differential of Price to Sale ratios Method calculates brand value as the distinction between the expected price to sales ratio for a branded corporation and the price to sales ratio for an unbranded organization and multiplies it by the sales of the branded organization. The reason why this approach may be used is due to the fact information is readily available and it is easy to conceptualize however the disadvantage is that the similar companies are a limited few and there exists no difference among the brand and different intangible assets including good customer relationships.
- Price Premium Method - The premise of the price premium method is that a branded product must sell for a premium over a conventional product. The Price Premium Method calculates the brand value by multiplying the price differential of the branded product concerning a generic product by the overall quantity of branded income. It assumes that the brand generates an extra advantage for consumers, for which they're willing to pay a bit extra. The fault in this approach is that where a branded product does not command a rate premium, the advantage arises on the cost and market share dimensions.
- Brand Equity based on discounted cash flow - The hassle faced by this approach is the same as when seeking to decide the cash flows(profit) attributable to the brand. Discounted Cash Flow does not appropriately take into account assets that don't produce cash flows presently. The benefit of this version is that it takes increased working capital and fixed asset investments into account. This approach is simple to use and the information is readily available, however, there is no separation among brand and other intangible assets and does not adjust, by their volatility, the earnings of the 2 companies compared, including discount price.
FORMULARY APPROACH OF BRAND VALUATION
The Formulary techniques are those that are significantly used commercially by consulting other organizations. This method is similar to the income or economic use approach differing in the magnitude of commercial usage and employing multiple criteria to decide the value of the brand. As we mentioned various techniques above, it is clear that a valuation of a brand is a challenging and tricky task no matter where brand valuation is done. Each brand may require a different technique. Some firms follow the Income approach for brand valuation in Mumbai, on the other hand, various firms use a combination of cost and formulary approach for brand valuation in Gurugram. It is on the will and analysis of the analyser, what approach they think is the best for them.
Resurgent India is a trusted and leading financial advisory that specializes in brand valuation in Gurgaon and Mumbai. The firm holds rich experience in the field and has a panel of experts that develop tailor-made solutions for their clients.