At a glance
Within the consumer
products sector,
brands are typically
the most significant
assets recognized in
acquisition accounting
under ASC 805.
Supportable valuation
and accounting for the
acquired brands is an
essential step in acquisition accounting.
Valuation methodologies for brands may
vary, but all require
significant industryspecific judgment and
expertise to ensure
supportable measurement and to avoid audit
surprises and the risk of
restatement.
Introduction
For many consumer products companies, M&A transactions are often
driven by the underlying brands. New brands can help fuel global
expansion. On the flip side, brand divestitures can help hone product
portfolio growth and profitability.
However, brand-rich transactions can be fraught with accounting
complexities. The main reason is that the term brand typically
encapsulates multiple components above and beyond just simple
tradenames.
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Acquired business
Tangible assets
Marketing related
Identifiable intangibles
Customer related
Trademarks
Distributor relationships
Trade names
Retailer relationships
Marketing materials
Order or production
backlog
Contractual and
non-contractual
customer relationships
Domain names
Technology related
Contract related
Supply contracts
Licensing and
royalty agreements
Computer software
Lease agreements
Databases
Construction permits
Advertising, management
and service contracts
Franchise agreements
Non-competition
agreements
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Valuation methods
The methodologies used to value an
acquired brand will ultimately depend
upon the components determined to be
included within its unit of account. The
two most common models for valuing
marketing-related intangibles such as
brands are:
1. the Excess Earnings method and
2. the Relief-from-Royalty method.
These two methods are forms of the
Income Approach, in which value is
equated to a series of cash flows and
discounted at an appropriate riskadjusted rate. The Excess Earnings
method calculates the value of an asset
based on the expected revenue and
profits related to that asset, less the
portion of those profits attributable
to other assets that contribute to the
generation of cash flow (e.g., working
capital, fixed assets, assembled
workforce, etc.). The Relief-fromRoyalty method, on the other hand,
is based on a hypothetical royalty
(typically calculated as a percentage
of forecasted revenue) that the owner
would otherwise be willing to pay to
use the assetassuming it were not
already owned.
In theory, the two methods should
arrive at the same value. However,
valuation specialists will typically
reserve the Excess Earnings method
for intangible assets deemed to be the
primary driver of profits. The Relieffrom-Royalty method is often used
for intangible assets deemed to be of
secondary significance.
Brand
Seller
Kellogg
Pringles
Proctor &
Gamble
Fila
Titleist
Fortune
General Mills
Yoplait
n/a*
Tempur-Pedic
Sealy
n/a*
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Alternative valuation
approaches
Income-based methodologies are
most prevalent in the valuation
of marketing-related intangibles.
However, certain aspects of a brands
value can, at times, be estimated with
alternative approaches.
A Cost Approach may be most common
for brand components that can be
readily reproduced, such as product
formulations. Even trade names can, in
certain rare instances, be valued with
such an approach if they were recently
launched and have not yet been
established in the marketplace. Again,
the distinction between push and
pull marketing may help guide the
decision as to whether a Cost Approach
is appropriate, as the cost to replicate a
name or mark is a more relevant metric
for push marketed products.
Although extremely rare, a Market
Approach can be considered to value
the components of a brand that have
an active market. In each instance,
acquirers should carefully consider the
facts and circumstances surrounding
the transaction at hand.
A note on
defensive assets
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10
is the key criterion for such classification. Well-known brands within the
consumer products sector often meet
this hurdle, as companies usually
expect to continue supporting these
assets with ongoing marketing efforts.
The factors that impact the
amortization period of an asset
are similar to those that should
be considered in determining the
economic life of the cash flows used
to value that asset. For that reason,
companies will typically look to the
period over which the cash flows used
in the assets valuations are forecast
to select an appropriate amortization
period or indefinite-life classification.
Reconciliation (but not necessarily
equivalence) between the valuation
forecast term and the amortization
period is often required in the eyes of
auditors and regulators. The selection
of the appropriate amortization
period can play a large role in postdeal dilution. Therefore, acquirers
and valuation specialists should
strongly consider the interplay
between the valuation assumptions
and the resulting impact on ongoing
netincome.
Impairment testing
Supportable initial valuations and the
selection of appropriate amortization
periods (or determination of an
indefinite life) are critical not only for
post-deal dilution analysis, but also
for ongoing impairment testing. The
initial assumptions and methodologies
used to value an asset in purchase
accounting typically form the basis
for how that asset is assessed for
Conclusion
Acquisitions in the consumer products
sector give rise to a number of
valuation and accounting issues that
require strong familiarity with the
technical accounting guidance as well
as deep industry experience. A number
of these complications arise as a result
of the large role that multifaceted
brands play within the industry.
Classification of the transaction
as a business combination or asset
acquisition, determination of the unit
of account for the acquired assets
and the assignment of useful lives all
necessitate a deep understanding of
the applicable accounting guidance.
The identification of market
participants and the selection of
appropriate valuation methodologies
and assumptions require substantial
technical valuation and industry
expertise. The combination of these
two skill sets will allow for better
planning for post-deal dilution, a more
streamlined review by auditors and
regulators, and a robust framework
when considering the possibility of any
future impairments.
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11
www.pwc.com/us/deals
Andrew Pappania
Principal, Deals
Valuation Services
(646) 471 0538
andrew.pappania@us.pwc.com
Martyn Curragh
Partner, US Deals Leader
(646) 471 2622
martyn.curragh@us.pwc.com
Reto Micheluzzi
Partner, Deals
Accounting Advisory Services
(415) 498 7511
reto.micheluzzi@us.pwc.com
Reuven Pinsky
Director, Deals
Valuation Services
(646) 471 8231
reuven.pinsky@us.pwc.com
Gary Tillett
Partner, Deals
New York Metro Region Leader
(646) 471 2600
gary.tillett@us.pwc.com
Scott Snyder
Partner, Deals
East Region Leader
(267) 330 2250
scott.snyder@us.pwc.com
Mel Niemeyer
Partner, Deals
Central Region Leader
(312) 298 4500
mel.niemeyer@us.pwc.com
Mark Ross
Partner, Deals
West Region Leader
(415) 498 5265
mark.ross@us.pwc.com
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