Brand valuation methodology

Summary
Formal brand valuation, incorporating quantitative and qualitative data, assists any firm to: Quantify strength and performance at a particular point in time; Understand the risk attached to future earnings; Determine an appropriate discount rate for internal and external valuation purposes; Improve performance tracking through clarifying lead indicators.

Key definitions
Brand is defined in this article as trademark and associated intellectual property with Branded business defined as the whole business trading under particular brands, the associated goodwill and all the other tangible and intangible elements atwork within the business.

Valuing intangible assets

The conventional approach to determining the value of intangible assets has four steps: 1. Determine the value of the Branded business that is trading under the Brand. 2. Subtract the estimated Fair Market Value (FMV) of the net tangible assets employed in the business from the value of the Branded business to determine the aggregate value of the intangible assets. Use accounting book value as an approximation for FMV in the absence of recent external valuations. 3. Use the most appropriate valuation methodology to calculate the value of the Brand. Brand Finance recommends the Royalty Relief approach for professional firm brands (see below). 4. Compare the calculated value of the Brand against the value of the Branded business and intangible assets as a sense check.

Royalty Relief
Royalty Relief is an economic use approach to valuation which determines the value of the brand in relation to the royalty rate that would be payable for its use were it owned by a third party. The rate is supported by a profit margin analysis of comparable companies. The methodology uses discounted cash flow (DCF) techniques to discount estimated future royalties at an appropriate discount rate to arrive at a net present value (NPV) which is held to constitute the brand value. Brand Finance uses Royalty Relief for four reasons: It is the most recognised method by technical authorities worldwide and favoured by accounting, tax and legal users because it calculates brand values by reference to comparable, third-party transactions. It ties back to the commercial reality of brands - their ability to command a premium in an arms length transaction. It can be performed on the basis of publicly available financial information. Profit margins have been shown to be directly correlated to the royalty rates that brands are able to command.

The detailed valuation process

1. Estimate future sales over a five-year period, with growth assumptions based on historic sales, market growth, competitive forces, and analysts projections. 2. Set a royalty rate range for each application of the brand by reviewing comparable licensing agreements and industry royalty rates. Having established a royalty rate range, pinpoint where along that range each brand lies using the Brand Strength Index - a tool that identifies the strength of each brand - to give a Brand Rating, conceptually similar to a company credit rating.

3. Calculate the discount rate specific to each application of the brand using the Brand Rating. A stronger brand should be positively reflected as its earnings are likely to be less volatile than weaker brands operating in the same sector and thus less risky (and vice-versa for a weaker brand). 4. Calculate future royalty revenues by applying the royalty rate determined in step 2 to estimated future sales from step 1. Discount future royalty earnings to a NPV using the discount rate determined in step 3. The NPV of this stream of (notional) royalty payments represents the value of the brand. 5. Where a firm has a portfolio of brands, brand value will usually be shared between the corporate brand and sub-brands. Ascertain the extent to which the corporate brand endorses sub-brands and its relative importance in influencing client perceptions.

Simplified example of a royalty relief valuation

Trademark Valuation - Royalty Relief (into perpetuity) Value - Years to 2011 Value in Perpetuity Trademark Value Trademark Valuation - Royalty Relief Euro 000s Year ended 31 December Revenues Royalty Rate* Forecast Brand Contribution Taxation Tax Rate %* Royalty Earnings After Tax Discount Rate Discount Factor* Discounted Royalty Earnings Historic 2005 2006 500 3.0% 15 (5) 35.0% 10 Forecast 2009 531 3.0% 16 (6) 35.0% 10 12.0% 1.40 7 37 78 115

*Royalty, Tax and Discount rates are for illustrative purposes only.

2007 510 3.0% 15 (5) 35.0% 10 12.0% 1.12 9

2008 520 3.0% 16 (5) 35.0% 10 12.0% 1.25 8

2010 541 3.0% 16 (6) 35.0% 11 12.0% 1.57 7

2011 552 3.0% 17 (6) 35.0% 11 12.0% 1.76 6