Brand Valuation

Brand
According to Philip Kotler A brand is a name,

term, sign, symbol or a combination of them which is intended to identify the goods or services of one seller to differentiate it from those of competitor.
According to J. Hugh Davidson A brand enable

consumer to identify product or services which promise specific benefit. They arouse expectations in the minds of customers about quality, price, purpose and performance. A brand stands out from commodity because it lacks identity.

Cost approach
The value of Brand may be obtained by aggregating the

cost (historical costs or replacement costs) incurred in developing the intangible asset.
The cost taken into consideration are research and

development, market testing, promotion and advertising.

The main issue is ascertaining the cost associated with the

brand.
The demerit of this approach is that the value of an asset

reflects the benefits that are expected from it and there is hardly any correlation between the expenditure on an intangible asset and its value.

Estimating Brand Value with Selling & Advertising Expense

Year Selling & advertising exp 1000 1100 1200 1300 1400 Portion of S&A exp related to brand value 500 550 600 650 700 Amortized expenses Unamortize d expenses

1 2 3 4 5

50 55 60 65 70

0 55 120 195 280

6 7
8 9 10 Value of

1500 1600
1700 1800 2000

750 800
850 900 1000

75 80
85 90 100

375 480
595 720 900 3720

Cost basis of Valuation

Historical Cost Advantages Disadvantages Replacement cost Advantages Disadvantages

Identifies direct and indirect cost attributable to a brand

Measures non cash cost

Identifies possible substitutes

Estimates the cost of replacement

Ignores the distinct feature of a brand

Is highly subjective in nature

Aggregate cost estimate the brand

High expenditure does not imply high brand value

Market Based Methods

Market based methods signify the value at which the brand can be sold in the open market.

Advantages Uses similar brands for purchase as a base Modifies brand value according to features of a brand

Disadvantages Assumes market for similar brands Price paid may include element of overbid

The DCF Approach

The value of an intangible is determined by

estimating the cash flows or earnings expected to be generated by the intangible asset and then capitalizing it by using an appropriate discount rate.

Interbrand Method
Interbrand is a U.K based marketing consultancy

that pioneered the brand valuation formulary approach.

The method considers the potential earnings of

the firm that is multiplied with brand earnings.

they have formulated two concepts

a. brand multiple b. brand strength

Brand Multiple
It is the ratio of brand equity to brand net profit and measures the brand strength.
The formulary method comprises the following steps

1.

Determine the weighted average profit of the brand for three years an after tax basis generated by the brand. The years are previous years, current year and next year.
Determine the industry P/E multiple. The P/E ratio multiplied by brand strength gives brand multiple. P/E = market price per share/earnings per share BM = P/E * BS

2.

3. Brand value is the product of weighted average after tax profit multiplied by brand multiple.

Brand Strength
This is a function of seven brand attributes
1. 2. 3. 4.

Is the brand the market leader? leadership of brand

How much is the consumer loyalty for the brand? stability of brand What is the future of the brand vis-avis its competitor? market prospects How much is the national and international presence of the brand? international and national potential

5.

What are the long term and short term trends of in brand image and awareness?trend of image and awareness

6. 7.

How much is the investment in the brand? support

How much legal protection does the brand have from others in the same trade?legal protection of the brand

Illustration
The score for the seven brand attributes of a given brand are shown in the table below. What is the brand strength and brand multiple, the P/E of the industry is 18 and average profit is 30 million?

Factors Leadership Stability Internationality Support Protection Market

Max score 25 15 15 15 5 5

Example 20 4 6 10 4 1

Trend Brand strength

20 100

10 55

Illustration
The table shows the brand strength scores for the three brands A, B and C having brand strength of 76, 54, and 46 respectively. If the industry P/E is 12 , then what is the brand multiple for the three brands?

Factors Leadership Stability Internationalit y Support Protection Market Trend Brand strength

Max score 25 15 10 25 10 10 5 100

Brand A 19 12 07 18 7 8 5 .76

Brand B 19 9 6 5 5 7 3 .54

Brand C 10 7 8 2 7 8 4 .46

Illustration
Brand Fortuner of Fortuner PLC has operating profit for the current year

equal to Rs 10,000 million which is likely to grow at 15%. The previous years operating income was Rs 8500 million. The industrys P/E ratio is 12. If the tax rate is 35% and the score for brand attributes is given in the table below, determine its brand value by Interbrand method. Factors Leadership Stability Internationality Support Max score 25 15 15 15 Example 10 4 6 10

Protection
Market Trend Brand strength

5
5 20 100

10
1 10 51

The Royalty Relief Method

This method is based on the premise that if a

company lets its brand for commercial purpose to another firm the royalty the second firm would pay for the use of the trade mark of the first firm is the brand value.
The net present value of the cash flows (at a

given royalty rate) arising to brand holding company is the value of the brand

Illustration
Find out the value of the brand A using the

following information.
Sales revenue Growth rate Royalty rate Useful life of brand in years Discount rate Tax rate

6,00,000 5% 6% 6 10% 35%