Brand Valuation and Acquisition: Multidimensional understanding required

A brand is an unwritten statement about the attributes of the products services or the company. A brand differentiates its product or service from competitors' products and services by signaling certain key values specific to it. Consumers of the product and services make some emotional relationship with the branded products and services.

Valuing brand requires in depth understanding of factors like resources invested, purpose of the valuation and more importantly strategic benefits. This article focuses on understanding the top management attitude towards the business, different methods of valuation with applicability, the discount rate to be used prudently, general steps of valuing brand and how to avoid different risks after the brand acquisition.

What it requires to create?
Creation of brand equity requires a lot of commitment from the organization heads. It also requires huge and regular money to be invested in brands and sustained effort of the intellectuals over a period to create it. The worse thing is that at the time of implementation of strategies to create awareness about the brand even organization does not know that whether it will succeed. Following are the things required:

• Commitment and leadership of the top management
• Sustained vision statement
• Preservation of culture/better culture of the organization, and
• Implementation of strategies like where the organization wants to see itself or its particular products after, say, 5 years.

Change in the top-management should not affect the vision statement only because of new management has different strategies than going-management.
First steps in creating the brand in deciding that where the company or it brand wish to reach after, say 5 years and then starts continuous invest in brand building. It decides upon that whether to make company name as brand icon or a particular product. Brand building and management of a single product is relatively easier than crating a brand name of the company. Creating company as a brand need sustained effort right from inception of the company. It involves building up the good culture, relationship with its suppliers and customers. It takes care of all the directly or indirectly interested parties. When the company has established its name as brand, consumers start associating all the products of the company with the name of the company and it becomes easier for the company to penetrate with the new product. In case, the company makes its product identity as brand, that brand name may not support the other new products ready to enter into the market.

Brand valuation has very wide application including:

• Brand management
• Benchmarking with competitors’ products
• Monitoring value  
• Creating a brand-centric culture
• Mergers & Acquisitions
• Joint-venture negotiations, etc.

How is Brand Valued?

Brand valuation approach depends upon many things and requires complete understanding of Purpose, industry dynamics in which the company falls, stage of the industry etc.

In a commonly accepted method called excess earning method, profits produced by the brand over a period are discounted to net present value using a suitable discount rate. We generally estimate the excess earning over and above the required rate of return (opportunity cost) in employing the Fixed Assets and Working capital. The discount rate used for discounting the excess return should be higher than the required rate of return of the equity shareholders because of its intangibility.

Another method, sales premium approach considers the incremental price charged due to its brand equity over and above any local brand of comparable quality and then it discounts with some discount rate.

In a highly competitive market sales premium approach may not be applicable because the leader is charging the same price for its products as others are charging. This case may happen due to fragmented nature of the industry. In that situation we need to estimate the economic benefit derived by the owners. Difficulties arise in quantifying the economic benefit. The economic benefit derived by the brand holders includes savings in amount invested in advertisement to generate a particular level of sales compared to comparable costs are incurred by the competitors.

The above methods are mainly suitable for valuing the brand equity of a particular product and not the company. However, similar methods may be applied on case on case basis. One important thing- what the acquiring company is going to achieve- should be found out. Thus from acquirer angle the brand valuation is bound to be different than any other’s angle. Acquirers generally pay strategic price for brand that may be different from what the brand holders’ value.

Another simplest method is to brand is to add the amount of money invested in brand over the last few years. However, the valuer who is going to acquire the brand should give weight age to the fund invested in brand creation plus the amount invested to bring the brand the level at which, it started generated sufficiently larger money to the company. The amount invested in the last few years should be adjusted with the inflation, persisted in the said years. This method is not applicable for the valuing the brand of the companies, which fall under very nascent industry and the industry does not have even sufficient number of players and has not seen the brand investment dynamics. But this method is relatively more useful in case of valuing brand of Coca cola or Pepsi.

Discount rate used in brand valuation

Discount rate used in Excess Earning method or Sales premium approach is very critical as it changes the value of brand drastically. Required return on Investment in Net Working Capital (excluding cash and Loans and advances) is opportunity cost of employing funds in NWC. Since it is highly liquid with replaceable at current market price, the required rate on investment could be assumed at risk free rate or the rate at which the company (brand owner) is able to raise fund for working capital plus a premium of 2-3%- the latter is more suitable. On the other hand, Opportunity Cost of employing funds in Fixed Assets can be taken with 5%-7% premium over and above the required rate on investment on NWC. For discounting the Excess return achieved due to brand, further premium of 3-5% needs to be taken as to assess the profits from brand is very risky affair.

We must note that as the Brand valuation methods based on income approach and excess earning approach consider the future profitability of the company, it is expected that after some point in time, the value of the brand would change (normally will increase until the brand gets diluted due to entrance of some stronger brand and the former does not respond to the event within time) drastically.

As the company would be clearer about the industry dynamics and would be able to take corresponding actions
Penetration power of the products and grabbing higher market share would be much easier because the company is already ahead of many big or comparable players on some key fronts.

Risk in Brand valuation

1. The earlier owner of the brand may have crated a competing products due to its expertise and able to sell more effectively due to its well understanding of the market and having good reputation in the mind of customers; thus loss of revenue.
2. The actual life of the brand may be less than the estimated life

A brand acquirer must have basic requirements to reduce the risks arising after the brand acquisition deal:

1. Non-competence agreement with the selling party on no production and marketing of products with same specification of the products up to some years
2. Non-competence agreement with the selling party on no marketing of products in the same market
3. The buyer must have necessary marketing infrastructure to market the brand
4. The payment for the brand acquisition may be structured on earn out basis

 Conclusion

While valuing the brand the buyer must under the concrete purpose of acquisition. It should also understand the dynamics of the industry and of course the future changing dynamics which affects the visibility of all the products available in the market. The brand acquirer should provide for the risks in the quantitative valuation methods prudently, which may come in future. Simultaneously, the acquirer should also draft the Brand Purchase Agreement carefully and negotiate clauses like non-competence, exclusive sell of technology used in the products etc.