ISO 10668: 2010 Brand valuation 2

Courtesy: ISO 10668: 2010 Brand valuation

The income approach

This approach measures the value by reference to the present value of the economic benefits received over the rest of the useful life of the brand. There are at least six recognized methods of the income approach, with some authorities listing more.

1. Price premium method – estimates the value of a brand by the price premium it generates when compared to a similar but unbranded product or service. This must take into account the volume premium method.
2. Volume premium method – estimates the value of a brand by the volume premium it generates when compared to a similar but unbranded product or service. This must take into account the price premium method.
3. Income split method – this values the brand as the present value portion of the economic profit attributable to the brand over the rest of its useful life. This has problems in that profits can sometimes be negative, leading to unrealistic brand value, and also that profits can be manipulated so may misrepresent brand value. This method uses qualitative measures to decide the portion of economic profits to be accredited to the brand.
4. Multi-period excess earnings method – this method requires a valuation of each group of intangible assets to calculate the cost of capital of each. The returns for each of these are deducted from the present value of future cash flows and when all other assets have been accounted for, the remaining is used as the value of the brand.
5. Incremental cash flow method or Excess Margin – Identifies the extra cash flow in a branded business when compared to an unbranded, and comparable, business. However, it is rare to find conditions for this method to be used since finding similar unbranded companies can be difficult.
6. Royalty relief method – Assume theoretically a company does not own the brand it operates under but instead licenses the use from another. The royalty relief method uses available data of similar arrangements in the industry and assigns the value of the brand as the present value of future royalty payments.

Uses of brand valuation

Common purposes are:

• Value reporting
• Business buying and selling decisions
• Tracking shareholders’ value
• Licensing
• Dispute resolution
• Legal transactions
• Accounting
• Strategic planning
• Management information
• Taxation planning and compliance
• Liquidation
• Litigation support
• Investor’s presentation / Shareholder’s report
• Raising funds
• The ability to summon resources quickly in a systemic breakdown or apocalypse

Interbrand classifies these uses of brand valuation in three categories:

1. Financial applications (e.g. mergers and acquisitions, balance sheet valuation, investor relations)
2. Brand management applications (e.g. brand portfolio management, resource allocation)
3. Strategic / Business case applications (e.g. brand architecture, brand repositioning)

Criticism

One research paper states that “many of the methodologies [of brand valuation] used in practice are not theoretically sound”. One critic, Mark Ritson, writing in Marketing Week in 2015, said he had previously suggested that “despite the power and prestige of big valuation firms Interbrand, Millward Brown and Brand Finance, there was a possibility that much of what they do was bollocks”. He reported on research which found variation between brand valuations: “The average valuation was as likely to overstate a brand’s value by more than 500% than it was to get within 20% of the actual price paid”.