What is brand valuation? A tool that connects brands to financial performance

No one can deny the important role of brands in creating and maintaining the financial performance of a business. Do you know what brand valuation is? How much is your brand worth? Brand is an intangible asset, so brand valuation is not easy. But knowing its value will be very useful in shaping the business strategy and marketing strategy of the business.

1. What is brand valuation?

According to P. Kotler and K. Keller, brand valuation is the process of estimating the total financial value of a brand.

Brand valuation will evaluate the brand based on the following criteria:

• Financial forecasts: Expected profit/loss
• Role of the brand: Percentage of a company’s revenue attributed to the brand
• Brand strength: Risk of the brand

Previously, brand valuation was based solely on the value of tangible assets. However, in 2005, International Financial Reporting Standards (IFRS) accepted that, along with tangible assets, intangible assets such as brands and other intangible assets are also valued on a company’s balance sheet.

There are two approaches to brand valuation:

• Technical valuation: Usually performed for balance sheet reporting, tax planning, litigation, securitization, licensing, mergers, acquisitions, and investor relations purposes. Focuses on arriving at a valuation point that represents the value of the brand or brand.

• Commercial valuation: Often used for the purposes of brand architecture, portfolio management, market strategy, budget allocation. Aims to measure the role of the brand in influencing key variables in the model.

2. The importance of brand valuation

Global brands have demonstrated that brand strength can drive growth by leveraging reputation and customer loyalty. Apple, Coca-Cola, Nestle are such brands. According to Forbes, Top 5 most valuable brands The world in 2020 is:

• Apple: 241.2 billion USD
• Google: 207.5 billion USD
• Microsoft: $162.9 billion
• Amazon: $135.4 billion
• Facebook: $70.3 billion

Strong brands have value beyond the financial aspect, including customer loyalty, customer satisfaction, and customers’ willingness to pay even at a higher price.

Therefore, brand valuation is an extremely important aspect, businesses are increasingly trying to determine a financial figure for their most important intangible asset, which is the brand. Brand valuation is the link between Marketing and finance.

Currently, brand valuation is used by businesses for many purposes:

• Mergers and acquisitions
• Licensing
• Fundraising
• Brand evaluation
• Budget allocation

Thus, it can be seen that for mergers, divestments or equitizations, specific brand asset figures from brand valuation activities play an extremely important role, because it accurately determines the value of the business. Or when businesses need to strategically plan to manage brand portfolios and improve brand equity, they need the right measurement methods to track performance over time.

Some potential benefits of brand valuation for marketers:

• Link investment decisions to brand valuation results
• Understand the relative contribution of business units, geographies, or customer segments to total brand value
• Use it as a key performance indicator to track over time
• Elevate the importance of internal branding as a strategic asset
• Filter strategic partnerships by understanding your business’s strengths, weaknesses, and what you want/need from a partner
• Negotiate sponsorships and other partnership opportunities
• Improve communication with CFOs and C-suite executives other
• Turning research data into actionable information

Overall, brand valuation is a tool that helps marketers make more strategic decisions and have a stronger voice on the board. In a data-driven world, executives demand to know how their brand investments are performing. Brand valuation helps marketers be accountable.

3. Brand Valuation Methods

Brand valuation models are similar to tangible asset measurement models. Thus, we will have 3 brand valuation methods including:

• Cost approach: Assumes that it is possible to value a brand based on the cost of building or the cost of recreating it. However, past construction costs are difficult to determine the current value. And unique brands are not easily replicated.

• Market approach: Looks at comparable market transactions, companies, or stocks. If these transactions are available, it is possible to estimate the value of a brand by comparing it to the value of another comparable brand. However, this approach is rarely used.

• Income approach: Includes two common forms: the royalty-relief method and the discounted cash flow (DCF) method.

3.1 Royalty-relief method

The Royalty-relief method assumes that a business does not own the brand and therefore needs to license it from someone else. If a brand is licensed from a third party, a royalty is charged for the privilege of using the brand. Conversely, ownership of a brand eliminates the need for a royalty. This method is not widely used in legal cases because it is difficult to prove and depends on finding an equivalent royalty and the details behind their calculations.

3.2 Discounted Cash Flow

This method looks at the free cash flows generated by the business under strong assumptions. An appropriate discount rate is then applied to determine the present value of the business. This is the most commonly used form of brand valuation today.

The discounted cash flow method is divided into 3 areas:

• Financial analysis to isolate free cash flow
• Brand dynamics analysis to determine the impact of the brand on that cash flow
• Brand risk analysis to reduce free cash flow based on calculated risk

Brand Valuation is an important business tool that helps businesses plan, optimize and clearly orient the future. In this way, businesses can identify opportunities to increase revenue or ways to reduce costs, reduce risks so that they can have more solid steps forward.

For any questions about brand valuation, please contact Adsmo for the most specific and detailed advice.

See more:

• What is brand equity?
• What is brand protection?