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  Catherine Tremblay A How-To Guide to Assessing Brand Value
by Catherine Tremblay
May 19, 2008

A brand can be a business’ most valuable asset, yet its value is generally not reflected in the financial statements. As with other intellectual property, its value is accounted for on the balance sheet only when acquired from another business or as a result of a business combination, but not when generated internally. How, then, is management to track brand value and make informed decisions with respect to what could be the company’s most valuable asset?

The answer lies in business valuation—both theory and practice. The methods used in valuing businesses can be applied to valuing intangible assets and intellectual property, including brands.

We must first determine: What does a “brand” encompass? A brand can include a trademark, logo, trade dress, packaging, marketing strategy, colors and all the elements that consumers associate with the brand image. We should also keep in mind that some brands have sub-brands, (e.g., Coca-Cola has Classic Coke, Diet Coke, Cherry Coke, Zero, etc). Furthermore, part of the value of a brand can be attributed to certain other intangible assets. In the Coke example, the special recipe (formula) is part of the brand’s success. We need to “zero-in” on exactly what it is we’re valuing (pun intended).


Continuing with the Coke example, Interbrand valued the Coca-Cola brand at an estimated $65.3 billion in 1997, assigning it the number one rank among brands worldwide. In comparison, the net book value of the intangible assets recorded on Coca-Cola’s financial statements was merely $3.7 billion, which shows that the brand’s value goes largely unrecognized on the balance sheet. What’s more, Coca-Cola’s market capitalization (i.e., the stock market’s valuation of the company) was an estimated $140 billion, which, when compared with the brand value of $65.3 billion, shows that the market attributed value to intangible assets well over and above the estimated brand value.

There are three fundamental approaches to be considered in valuing a brand:

  • The cost approach;
  • The income approach; and
  • The market approach.

The cost approach is based on an accumulation of the costs incurred to build the brand since inception, such as historical advertising and promotion expenditures, campaign creation costs, trademark registration costs, etc. However, it is generally the least applicable approach in the valuation of brands because the cost of developing the brand usually bears little relationship to the brand’s income-generating potential. After all, investors are interested in the brand’s ability to generate future earnings.

The income approach is based on the net present value methodology, which seeks to measure the economic benefit of the brand to be generated from a stream of future earnings or cash flows. One possible application of this approach is the “incremental income” method, based on the premise that a branded item can command a premium selling price compared to similar, less well-known products. The branded item can also bring about economies of scale in production, due to larger volumes of sales from higher market demand.

However, the business valuator will offset the advertising expenses that are required to maintain brand awareness over and above that of a non-branded product. Forecasts and projections are made of the income stream to be generated from the increased sales and cost savings, net of additional advertising and promotional costs, specifically attributable to the brand. The net present value of the future incremental income stream generated by the brand would be determined by applying a discount rate. This discount rate is based on the rate of return that an investor would expect on an investment in the brand, based on its risk profile and characteristics. The higher the perceived risk, the higher the required return.

An alternative method that can be applied under the income approach is the projection of a stream of earnings or cash flows for the business as a whole, against which contributory charges are applied to recognize the contribution of other assets (e.g., working capital, fixed assets and other intangible assets) in generating the overall income stream attributable to the brand. The residual income stream attaching to the brand is then discounted to its present value as noted earlier.

The market approach estimates the value of a brand by reference to market transactions involving similar brands. The most common application is the relief-from-royalty method, which assumes that the user of a brand would have to license the rights to use it, if the user was not also the owner of the brand. In other words, if a company owns the brand, it avoids the payment of royalties for the use of the brand. The royalty rate is generally a market rate derived from an analysis of royalty or license agreements for similar assets (used as “guidelines”).

Adjustments are made, as appropriate, to reflect differences between the risk profiles, industry conditions, brand awareness and strength, geographical coverage, and other characteristics of the subject brand as compared with those of the “guideline” brands in the market. The estimated royalty rate is then applied to the forecasted net revenues to be generated by the brand, with the result discounted to present value using an appropriate rate of return as described above. The principal difficulty with the market approach is finding comparable and meaningful transactions from which to derive an applicable royalty rate, and making the appropriate adjustments to reflect differences between the brands under comparison.

In a nutshell, the valuation of a brand can be more of an art than a science—but it’s an exercise that can help management identify and develop the value drivers behind the brand. Professionals, such as Chartered Business Valuators and members of the American Society of Appraisers, can provide insight and assistance in the valuation of brands and other intangible assets.

   Catherine Tremblay is a member of The Canadian Institute of Chartered Business Valuators and a Partner with the firm Wise, Blackman, Tremblay LLP in Montreal, Canada.

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A How-To Guide to Assessing Brand Value
 This is a nice article. 
anonymous - May 19, 2008
 Dr Johnson recounts that an Oxford acquaintance was told by his tutor: "Your work is both good and original. Sadly, that which is good is not original; and that which is original is not good." This thought passed through my mind after I had read Catherine Tremblay's article. She is to be congratulated for her very thorough study of Interbrand's many books and articles on brand valuation. But she offers no new thoughts on the subject. I am sure that Wise, Blackman Tremblay LLP is an excellent firm. But this article confirms me in my view that if you need to get your brand valued, then you should go to an expert who really understands brands, and not a legal practice. After all, if I get a toothache I would probably consult my dentist, not my GP. Tom Blackett 
Tom Blackett, -, - - May 19, 2008
 It''s a very interesting article, the brand evaluation is important issue because intangible asserts rising a market engine. 
anonymous - May 20, 2008
 As a regular reader of Interbrand publications on branding, I feel Tom Blackett´s comment on this article is very appropriate.

Our firm has been publishing for the past six years the study “Colombia’s Most Valuable Brands” (Colombia in South America, not Columbia, the US district). We have been dwelling with many issues that our specialty faces.

The following are some examples of these “good and original” issues: how to use brand value to measure the performance of management teams; how to isolate for the volatility of brand value attributable to market conditions (not brand related); how to value emblematic brands associated to enterprises that have gone out of business; the appropriateness of the amortization of brands; when brand value should or should not be included in financial statements, etc.

I encourage Tom Blackett and other experts to share their views… and who knows, maybe I’ll have to find some time to give it a shot. 
Fernando Gastelbondo, President, Compassbranding - May 20, 2008
 From a text-book stand point, the valuation approaches described in the Ms. Tremblays article are correct, but insightful brand managers or investors should beware. Both cost and market approaches present severe limitations, as described in the article. The cost approach is highly inaccurate and should be a last resource only when valuing brands with a very short life span. The market approach, while solid from a financial theory standpoint, is impractical as there are very few comparable market transactions available. Furthermore, if anything, it should be used as a cross-check for validation. The income approach, when properly applied, portrays the true ability of the brand to generate future earnings and is widely accepted as the preferred approach by practitioners worldwide. Here, the key to accomplish meaningful results lies in the appraisers ability to understand consumer drivers and hence separate earning generated by the brand from those generated by other assets. The current proliferation of shortcuts such as brand transaction multiples or royalty-relief (a hidden market multiple method) present significant problems. Financial literature states that assets valuation through comparable multiples (traded or m&a transactions) is not completely accurate for different reasons (lack of comparability, entity specific factors, timing etc), preferring income methods instead such as DCF, APV etc. If the appraiser has no choice but using royalty-relief when valuing a brand, then it is important to be aware that in the royalty rates there are embedded many things other than brands, and thus major adjustments need to be done to "isolate" the brand component in the royalty from other assets such as know-how, processes, systems etc. 
Jaime Martin, Director - Brand Strategy and Valuation, Interbrand Madrid - May 21, 2008
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