Brand Valuation: The Dark Arts of Intangible Valuation

You are a brand manager at an iconic company with a household name brand that has been built over decades. The CFO calls you into a meeting and informs you that the company has been approached by a large private equity firm interested in acquiring a majority stake. They want to know the value of the company’s intangible assets, especially the brand. Your mind races. How do you put a number on something as ephemeral as a brand that permeates culture? Brand valuation is more art than science. There are methodologies, but variables can be tweaked to justify almost any number. The higher the number, the more the acquiring firm will pay. But go too high, and the deal may fall through. The dark arts of brand valuation rely on psychology as much as finance. How much is your brand worth? That depends on how much someone is willing to pay for a piece of the cultural zeitgeist you have created. The number could be very big or disappointingly small. So begins the delicate dance of brand valuation.

 

What Is Brand Valuation?

Brand valuation is the process of determining a financial value for a brand. It aims to quantify an intangible asset—a brand’s reputation, prestige, and market presence.

How It’s Calculated

Brand valuation merges hard data like sales and growth forecasts with softer factors such as brand awareness, loyalty, and image. Valuators analyze a brand’s:

  • Market position and share relative to competitors

  • Price premium over competitors

  • Revenue, growth, and earnings

  • Investments in marketing and brand-building

  • Trademark registrations and intellectual property

They then determine what portion of a company’s value is attributable to the brand alone using complex financial modeling. The resulting brand value reflects the brand’s impact on current and future company cash flows.

Why It Matters

Brand valuation is useful for mergers and acquisitions, tax planning, strategic decision making, and financial reporting. It provides an objective measure of one of a company’s most valuable assets—a basis for determining a fair acquisition price or how much to invest to strengthen a brand. For public companies, brand value can also be reported as an intangible asset on financial statements, demonstrating the brand’s contribution to shareholder value.

While imperfect, brand valuation aims to make the intangible more tangible. It synthesizes both the hard facts and the softer perceptions that shape a brand’s power and financial worth. For companies, understanding brand value is key to maximizing one of their most strategic assets.

 

Why Is Brand Valuation Important?

As an investor or business leader, you make important decisions that depend on the value of intangible assets like brands. But brand valuation is challenging – it relies on uncertain estimates and subjective judgments. This “dark art” of finance merits a skeptical and vigilant outlook.

Why Is Brand Valuation Important?

Brand valuation informs key business decisions, guiding strategies in marketing, investment, and growth planning. It’s essential for accurate financial reporting, helping companies comply with accounting standards and regulatory requirements. In mergers and acquisitions, brand valuation is crucial to determine fair pricing, negotiate deals, and understand the value of intangible assets.

While brand valuation aims to determine a brand’s economic worth, the truth is elusive. Valuations depend on fallible assumptions and imperfect models. Brand value can evaporate quickly, as demonstrated by high-profile corporate scandals. And the metrics used, like brand awareness or loyalty, do not always translate to real financial impact.

As an executive or investor, approach brand valuation with a critical mindset. Question the assumptions and methods behind estimates. Consider a range of plausible values rather than accepting a single number. Look for independent verification of important brand metrics. And avoid over-relying on brand value when making key strategic decisions or reporting financial results. The value of intangible assets remains challenging to pin down with precision. With a skeptical outlook, you can make better use of the dark art of brand valuation.

 

Using the Cost Approach for Brand Valuation is Less Than Optimal

The cost approach for valuing a brand fundamentally does not work. This method relies on quantifying the costs incurred to develop the brand, such as marketing and advertising expenses. However, a brand’s true value stems from intangible factors – its reputation, customer loyalty, and future potential – that are not captured in such a simplistic calculation.

  • Costs do not equate to value. The money spent creating a brand does not directly translate to its worth or market potential. Brand value is highly subjective and unpredictable, emerging from the complex interplay of a company’s identity, customer experiences, and other perceptual elements in people’s minds.

  • Future value is overlooked. A brand’s current costs reveal nothing about its capacity to generate future revenue and long-term customer relationships. Strong brands continue appreciating in value over time through increased visibility, loyalty, and market dominance. The cost approach disregards these growth prospects, focusing only on past expenses.

  • Intangibles are not quantified. A brand’s most valuable attributes – its reputation, prestige, and emotional resonance with customers – cannot be reduced to a dollar figure based on costs. These ineffable qualities determine a brand’s ability to influence purchasing decisions and secure premium pricing. The cost approach lacks a mechanism to evaluate such intangible brand assets.

In summary, the cost approach should not be used as a brand valuation method. It relies on an outmoded concept of value based solely on costs incurred, rather than recognizing that a brand’s worth emerges from a multitude of intangible factors involving its image, status, and relationship with customers. Valuing brands requires a more sophisticated analysis of their qualitative strengths and future potential. The cost approach fails on all these fronts.

 

Using the Market Approach for Brand Valuation Also Falls Short

The market approach for brand valuation relies on comparable transactions of similar brands to determine a brand’s value. However, finding directly comparable brand sales is difficult due to the uniqueness of each brand. No two brands are exactly alike in their positioning, customer loyalty, and other intangible attributes.

Overlooking Unique Brand Factors

The market approach overlooks these unique brand factors that significantly impact value. Brands with higher customer loyalty and a strong, differentiated brand positioning typically command a premium over brands with a weaker position and connection. However, the market approach essentially values all brands within a sector the same based on recent transactions.

Short-Term Focus

Current market volatility and transaction activity can also skew the long-term value assessment of a brand. Brand value is ultimately driven by the future earnings potential and cash flow generation of the brand. However, the market approach focuses on the current state and recent transactions, which may under or overvalue a brand’s long-term potential.

Requires Large Data Sets

The market approach also requires a large set of recent, comparable brand transactions to determine an accurate market multiple. In some sectors, brand transactions are infrequent, providing little data to develop a meaningful market multiple. With little actual transaction data, the resulting market-based brand value can be misleading.

In summary, while the market approach for brand valuation appears straightforward, its focus on current market conditions and reliance on finding directly comparable brands fails to capture the essence of brand value. For most brands, an income approach that builds brand value from future earnings potential is a more comprehensive method. The market approach can provide a useful sanity check on brand value but should not be viewed as a primary approach.

 

Income Approach Provides the Most Robust & Defensible Brand Valuation

The income approach provides the most robust and defensible brand valuation. It focuses on a brand’s ability to generate future earnings, offering an realistic view of its economic potential.

Future Revenue Focus

This approach values a brand based on the revenue it’s expected to produce over time. It incorporates brand-specific factors like customer loyalty, market position, and growth potential. The income approach is adjustable to changes in the market and economy, providing a dynamic valuation.

Incorporates Brand-Specific Factors

The income approach considers the unique attributes that drive a brand’s earnings, including:

  • Customer loyalty and retention: Devoted customers translate to recurring revenue.

  • Market dominance: Leading brands in a market command premium prices and higher sales.

  • Growth outlook: Fast-growing brands have more potential to increase future earnings.

Adjustable to Market Changes

The income approach adapts to trends in consumer behavior, technology, regulations, and economic conditions. Valuations can be updated to account for:

  • Shifts in customer preferences that impact sales

  • Disruptive innovations that threaten a brand’s market position

  • Recessions or booms that drive changes in discretionary spending

  • New laws or policies that create opportunities or challenges for a brand

By focusing on the factors that truly drive a brand’s ability to make money over time, the income approach provides a robust and realistic assessment of even the most intangible of intangible assets. It is the approach best equipped to defend a brand’s valuation.

 

Quantitative Factors to Consider in Brand Valuation

When determining a brand’s monetary value, several quantitative factors come into play.

Historical and Projected Revenue

Analyzing the revenue streams directly attributed to the brand over the past 3-5 years establishes a baseline for valuation. Projected revenue over the next 3-5 years provides a growth trajectory. Both provide a data-driven look into the brand’s ability to generate income.

Market Share

A brand that holds a dominant market share, especially in a niche market, will typically command a higher valuation. Its position gives it power over competitors and influence over customers. Market share is a measure of a brand’s strength and longevity.

Profit Margins

The profit margins specifically attributed to the brand reveal how much it directly contributes to the bottom line. Higher margins mean higher valuations. Profit margins show how effectively the company is leveraging the brand to maximize revenue.

Growth Rate

A brand with a strong historical growth rate and high projected growth will have greater value. Growth demonstrates the brand’s resonance in the market and ability to scale over time. However, unrealistic growth expectations can artificially inflate a brand’s valuation. Growth must be sustainable and supported by other metrics.

Cost of Marketing and Advertising

The expenses allocated to build brand awareness and customer loyalty factor into valuation. Higher spending may indicate the brand requires significant support to maintain its market position. However, efficient spending that generates substantial returns points to a valuable brand. Marketing and advertising costs must be weighed against the brand’s overall financial performance.

Quantitative analysis provides an objective assessment of a brand’s current and future worth based on its ability to generate profit. When used with qualitative methods, it results in a comprehensive brand valuation. The monetary value of intangible assets depends on these measurable numbers.

 

Qualitative Factors to Consider in Brand Valuation

When determining a brand’s valuation, several qualitative factors provide insight into its intangible assets. These soft metrics capture elements of brand strength that numbers alone can’t.

Brand Recognition

The level of awareness and familiarity consumers have with a brand is crucial. Well-known brands are viewed as reputable and trustworthy, commanding premium prices and loyalty. Measuring factors like unaided brand recall and brand visibility allow valuators to gage recognition.

Customer Loyalty

Devoted customers who repeatedly purchase from a brand are invaluable. Their lifelong value far surpasses the initial sale. Evaluating metrics such as repurchase frequency, customer satisfaction, and net promoter scores helps determine loyalty.

Brand Heritage and History

An established brand with tradition and longevity benefits from perception of stability, quality, and expertise. Its heritage forms an emotional connection with customers, passing between generations. Understanding a brand’s key milestones, evolution, and cultural impact establishes its historical significance.

Market Positioning

A brand’s standing within its industry or niche is shaped by variables like perceived quality, innovation, and prestige. Leaders in a category, known as “premium brands,” enjoy competitive advantages and pricing power. Analyzing a brand’s target audience, personality, and ranking among competitors provides insight into its positioning.

Innovation and Adaptability

Brands able to anticipate and quickly respond to changes in consumer preferences and market trends have a distinct edge. Continuous innovation and adaptation are required to stay relevant. Reviewing a brand’s product development pipeline, social awareness campaigns, and shifts in brand identity over time demonstrates its ability to evolve.

While quantitative metrics provide an initial valuation estimate, these qualitative factors add depth and context. They capture the soul of a brand—its essence and spirit—which translates into financial value. Considering them helps ensure an accurate brand valuation.

 

Using the Relief from Royalty Method for Brand Valuation

The relief from royalty method values a brand based on the hypothetical licensing fees a company would pay if they had to license the brand from a third party.

Royalty Rate

The royalty rate represents the percentage of revenue that would be paid for the rights to use the brand. This is estimated based on royalty rates for comparable brands and licensing deals. For example, a strong, well-known brand in a stable industry might command a royalty rate of 5-10% of revenue, while a lesser-known brand in a rapidly changing tech field might be 1-3%.

Brand-Specific Revenue

This refers to the total revenue generated specifically by the brand, not including revenue from other intellectual property or physical assets. If a brand drives a majority of a company’s sales, most revenue can be attributed to the brand. For diversified companies with multiple brands, revenue must be allocated appropriately.

Brand Longevity

The estimated remaining useful life of the brand, considered its longevity, determines the time period over which royalty fees are calculated. Most brands lose strength over time due to market forces, so a brand with 20 years of longevity would generate more royalty fees than one with 5 years left.

Discount Rate

Future royalty fees must be discounted to their present value using an appropriate discount rate, which reflects the risk and time value of money. A higher discount rate reduces the present value of future cash flows. The discount rate depends on variables like the overall risk of the brand and broader economic factors.

Using these inputs, the relief from royalty method can provide a useful valuation of brand intangible assets. Like other methods, however, it requires a number of estimates and assumptions, and results can vary significantly based on the inputs selected. For an accurate brand assessment, multiple methods should be used together.

 

Using the Excess Earnings Method for Brand Valuation

The excess earnings method values a brand by isolating the earnings attributable solely to the brand, separate from other business assets.

Total Business Earnings:

The entire earnings of the business before isolating the brand’s contribution. This provides a starting point for separating brand-specific earnings.

Charges for contributory assets

involve calculating costs for using non-brand assets like physical assets and workforce, isolating brand-specific earnings. Think of this as the opportunity cost of the assets required to operate the business.

Brand-Specific Earnings:

The earnings remaining after deducting contributory asset charges, representing the excess earnings generated due to the brand. This shows the power of the brand in generating earnings over and above what non-brand assets can achieve.

Discount Rate:

Used to convert future excess earnings into present value, reflecting the risk profile and the time value of money associated with the brand’s future cash flows. A higher discount rate reduces the present value of future earnings.

The excess earnings method requires prudent judgment to determine appropriate charges for contributory assets. Being too generous inflates brand value, while being too stringent deflates it. Think of this as an art within the science.

Forecasting brand-specific earnings also requires care, as the brand’s power to generate excess earnings may fluctuate based on internal and external factors. Consider both historical performance and expected changes that could impact future earnings.

When done well, the excess earnings method can provide useful insight into a brand’s strength and value. But like any valuation method, the end result is highly dependent on the inputs and assumptions made. The “dark art” lies in navigating the uncertainties.

 

How to Think About Acquiring a Brand

When considering acquiring a brand, think carefully about the financial viability and strategic fit. Evaluate the asking price against the brand’s estimated valuation and future revenue potential to determine if the deal makes financial sense. Also assess how the brand complements your existing portfolio—does it align with your products, expand into new markets, or present cross-selling opportunities?

Analyze the brand’s market position and potential for future growth. Look at metrics like market share, competitive standing, and product innovation pipeline. Consider possible synergies that could reduce costs, boost sales, expand distribution, or facilitate cross-selling.

Plan the deal’s financial structure, considering how to fund the acquisition, tax implications, impact on your company’s finances, and how the brand will be accounted for. An all-cash deal may strain resources, while seller financing or stock options have different tax and accounting treatments.

Think about your motivations and risk tolerance. Are you making an offensive play to gain market share or a defensive move to block a competitor? How much are you willing to pay for potential upside? An expensive deal for a brand with limited viability or synergy likely won’t generate a good return on investment.

Consider the brand’s intangible assets, like intellectual property, customer relationships, and brand equity. These assets drive the brand’s value but can be difficult to evaluate. Look at metrics such as customer retention, brand awareness, product differentiation, and competitive advantage.

Review the brand’s contracts and commitments, including employee agreements, partnerships, licensing deals, leases, and distribution contracts. Be prepared to honor existing obligations or negotiate new terms. Understand any restrictions on rebranding, relocating, or restructuring the business.

An acquisition seems simple but requires rigorous analysis and planning. Evaluate the brand’s financials, market position, growth potential and strategic fit. Consider motivations, risk tolerance and how the deal will impact your company financially. Look beyond the obvious to understand the brand’s real sources of value and future opportunities. With thorough due diligence, you can make an informed choice and reap the rewards of a successful brand acquisition.

 

Implement a Strategy to Maximize Brand Value

To maximize your brand’s value, implement a strategic and systematic plan. As Daniel Kahneman noted, “Nothing in life is as important as you think it is, while you are thinking about it.” Don’t react hastily to short-term events. Instead, focus on the long game.

Define your brand positioning.

Determine how you want to be perceived relative to competitors. Find your niche and own it. This positioning will guide all future actions to build brand equity.

Focus on your key customers.

Identify your most valuable and loyal clients. Find out what they love about your brand. Double down on serving them even better. Their word-of-mouth advocacy and repeat business will drive growth.

Build a memorable brand experience.

Everything from your logo to customer service interactions should reflect your brand positioning. Evoke emotion and make a lasting impression. People may forget what you said, but they’ll always remember how you made them feel.

Promote actively and consistently.

Market across channels to raise brand awareness and reinforce your positioning. Social media, email campaigns, influencer collaborations, and search engine optimization are all paths to reach potential new clients. Staying top of mind with current customers maintains loyalty.

Continuously improve.

Monitor how people respond to your brand and look for ways to optimize the experience. Make incremental improvements over time. Small changes can have big impacts on brand perception and, ultimately, value.

With a methodical strategy in place, you can build a powerful brand that stands out in a crowded market. But remember, “Everything is more complex than you think, so aim to simplify.” Stay focused on what really matters to maximize your brand value over the long run.

 

Regular Brand Valuations Are Essential

A company’s brand is one of its most valuable intangible assets, yet it remains largely unquantified on the balance sheet. To effectively manage your brand, regular brand valuations are essential. They provide an objective measure of your brand’s strength and financial value over time.

Brand valuations offer key benefits:

  • They enable you to make informed, strategic decisions regarding brand investments and initiatives. You can determine how initiatives impact brand value and set key performance indicators to optimize your marketing spend.

  • They allow you to identify risks and opportunities. A declining brand value could signal issues with customer perceptions or competitive threats that need to be addressed. An increasing value means your branding strategies are resonating and creating opportunities for growth.

  • They strengthen your negotiating position. With an objective valuation in hand, you have greater leverage and credibility when negotiating partnerships, licensing deals, or selling your brand. Buyers and investors will perceive your asking price as fair and justified.

  • They motivate employees and build brand commitment. Employees take pride knowing their brand’s value and work to continually enhance it. Regular communication of brand valuations rallies your team around key priorities to drive value.

While brand valuations require an upfront investment of time and money, the long-term benefits to your business are substantial. They provide the hard numbers and strategic insights needed to actively manage your brand as a key business asset and source of competitive advantage. If you’re not valuing your brand, you’re flying blind and leaving money on the table. Make brand valuation a priority and reap the rewards of a strong, valuable brand.

 

Brand Valuation FAQs

Brand valuation is more art than science. As an intangible asset, a brand’s worth can be challenging to determine with precision. Let’s explore some frequently asked questions about how brands are valued:

What methodologies are used?

There are three main approaches:

  • Cost-based: Calculates the investment made to build the brand. Limited usefulness since it doesn’t reflect brand equity or future potential.

  • Market-based: Uses comparable companies and M&A deals to determine brand value. Difficult to find perfect comparables and often yields a wide valuation range.

  • Income-based: Estimates the discounted cash flow or royalties the brand is expected to generate. Complex to forecast but considered the most robust methodology. Multiple methods are often combined.

What is brand equity and how is it measured?

Brand equity refers to the value a brand holds in the minds of customers. It’s measured through consumer surveys and metrics like:

  • Awareness: How well known is the brand?

  • Perception: How do customers view the brand?

  • Loyalty: How devoted are customers to the brand?

Brand equity determines pricing power, growth potential and risk profile. High equity brands are very valuable.

What are the most valuable brands?

According to major brand rankings, the top global brands are big tech companies like Google, Apple and Microsoft, followed by media brands like Facebook, Coca Cola, and Disney. Valuations of $100 billion+ are not uncommon for these brands.

In summary, brand valuation requires evaluating both objective financial metrics as well as subjective brand equity. When done well, it provides strategic insight into a company’s intangible assets and competitive positioning. The most valuable brands in the world shape our daily lives and continue to gain influence each year.

 

Conclusion

So there you have it. An imperfect but necessary attempt at attaching a numerical value to something ephemeral yet profoundly impactful. Brand valuation is as much art as science, with reasonable people likely to disagree on the appropriate methodology or final number. But that is beside the point. What matters is that brands have value, they drive choice and loyalty, they facilitate premium pricing and lower costs, they attract talent and investors. While the methods will continue to be debated, the reality of intangible asset value is indisputable. The companies that understand, nurture and maximize the value of their brand will thrive. Those that ignore or underestimate it do so at their peril. Whether the number is “right” or not, the exercise of brand valuation itself creates focus, alignment and accountability. And that may be the most valuable outcome of all.

 

How can Eton help?

At Eton Venture Services, we pride ourselves on delivering professional, comprehensive valuation and financial advisory services tailored to your unique needs. Don’t settle for generic software models or inexperienced teams when it comes to critical financial valuations for your business. Trust Eton’s expert team to provide thorough, data-driven assessments that empower you to make well-informed decisions and optimize your intangible asset valuations. Join the industry leaders who have already benefited from Eton’s exceptional client service and advisory expertise. Get in touch with Eton Venture Services today.

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President & CEO

Chris co-founded Eton Venture Services in 2010 to provide mission-critical valuations to venture-based companies. He works closely with each client’s leadership team, board of directors, internal / external counsel, and independent auditor to develop detailed financial models and create accurate, audit-proof valuations.

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