You've decided you want a valuation done for your brand. But unless you can separate out the brand from the rest of your business, you can't value it. How do you do that? Ernst & Young's Sanjiv Agrawal provides some useful pointers, tips used by companies around the world.
For organisations wanting higher shareholder value, brands are a critical success factor. Brands ensure differentiation from competition and attract customer loyalty. Popular and successful brands are able to generate a reliable flow of future earnings, thereby creating shareholder value.
Valuation concepts (or prerequisites for a brand to be valuable)
Versatility: Unique assets may suffer in value considerably because they have little use outside the particular business. This is referred to as lack of asset versatility. A brand can be valued either on 'existing use' basis or on 'available use' basis, the latter incorporating the features of extendibility.
However, there are instances where brands have become very successful and valuable even without much extension. Coca Cola is probably a good example of this.
Value to the customer: A valuable brand builds up customer loyalty by creating value for the customers as well. The value for customers is built up by providing superior quality in terms of product/service (through better technology and integrity) or packaging, higher consistency therein across time and space, extensive advertising / public relations campaigns, etc.
Consistency of brand experience of the customer in the past is a significant factor in building up the brand name as well as the reputation about integrity of the brand owner. The latter in turn evokes the trust and loyalty of the customer in the brand and helps create expectancy of consistent experience in the future as well. It also enhances, at the same time, the possibility of brand extension/versatility.
Tata Group (diversified product base, built up gradually) and Infosys (eg, Progeon) are almost perfect, if not perfect, examples of this.
Value to the owner: Value can only be attributed to an identifiable brand (or any other intangible asset) if the strategic and operational strengths underpin the brand's ability to generate sustainable future economic benefits, such as market share, barriers to entry, etc.
For example, a dominant market share in an industry that exhibits high barriers to entry will certainly indicate a valuable asset. The future economic benefits may be generated in several ways.
For example, possession of a trademark may enable the owner to:
- Generate premium profits and excess returns in comparison to other operators in the relevant market;
- Generate a significant market share which creates economies of scale;
- Extend its product or service line into new product or service lines and markets;
- Erect a strong entry barrier for others to overcome
Criteria (or prerequisites for a brand valuation exercise)
In order to allocate a fair value to an identifiable brand out of the total value of the owning enterprise, four fundamental criteria must be satisfied with respect to that brand. It has to be separately identifiable, protected legally, transferable, and enduring in nature. What do these terms mean?
Separability: Where the brand is a legally separable asset, clearly distinguishable from the other assets of the business, separability may not present a major issue. In certain instances, however, brands can be inextricably linked to other assets or corporate name and separability may be difficult to attribute.
For example, corporate brands may not be separable product-wise if they are so used for products also. An example is Tata Salt brand name.
Transferability: This is similar to the above separability test. The test for transferability is whether the asset can be identified and sold or licensed to other users without disposing off the business as a whole legal protection: all rights related to the brands should be legally owned or controlled by the owner of the assets, i.e. capable of protection by a de facto right.
Enduring nature: The characteristics of an identifiable asset should be such that it can properly be regarded as a capital asset with enduring value creation ability rather than the carry over effects of recent capital expenditure.Do you want to discuss stock tips? Do you know a hot one? Join the Stock Market Discussion Group.
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