Brands and trademarks are valuable intangible assets. In 1998, Sussanah Hart and John Murphy [Interbrand] edited a book titled, Brands –The New Wealth Creators, because it was widely recognized that against the changing economic and financial background, commercial entities need to broaden their understanding of “what the assets of business are”] which, when established and used, are capable of producing revenue in their own right and which can be valued independently of other assets and of management and employees. This chapter contains an overview of applicable brand valuation methodologies for accounting [balance sheet] and other purposes [This methodology was developed by Interbrand in conjunction with Ranks Hovis McDougall and has since been used by, among many others, Grand Metropolitan. United Biscuits, Nabisco, BSN and Lion Nathan. It has been used in a host of applications besides the balance sheet including mergers and acquisitions, fund-raising, brand strategy
development and brand licensing].
Brands, Valuation and Wealth
It is accepted in the present commercial scenario that brands do create wealth. Maximizing brand value is simply a function of maximizing shareholder value; a goal that effective managers of all quoted companies recognize. Companies have increasingly come to be recognized and indeed reorganized around brands. Even in classic branded FMCG companies such as Unilever, their importance has been given a higher priority. In their recent reorganization, premium brands worldwide were specifically named as a key responsibility of the chairman of the operating divisions. This a far remove from the old model of brand manager control. Balance sheet issues may have provided the impetus for the development of brand valuation, but its application does not stop there. There is certainly no doubt that more information on brands, brand performance, and brand value should be disclosed in financial accounts. Companies are however varied of doing so and of disclosing the kind of information that they feel is competitively sensitive, and unless this is done their statements concerning brands end up appealing ‘like idle rhetoric’ and of little real use of investors.
A brand valuation can also be used in the planning and structuring of mergers and acquisitions. A significant amount of explicit comment was made by both sides about the brand value in the Rowntree/Nestle and Granada/Forte takeovers, with all parties claiming to be able to maximize the value of the brands involved. A similar role can also be seen in investor relations. Merrill Lynch issued a broker’s circular in 1996 that argued that the share price of Burmah Castrol would have to increase by somewhere between 25 percent and 50 percent in order to cover the analyst’s estimates of Castrol’s ‘brand value’. In a similar vein, both P & G and Unilever Annual Reports would not be complete without the (respective) Chief Executives reiterating their commitment to building their portfolios of leading brands. The purpose of such communication can also be focused for an internal audience, and indeed can be used as explicit benchmarks for performance in rewarding management.
Brand valuations of portfolios can also be used to help the crucial task of
resource allocation and as a tool for evaluating the success of the decisions
made! Franchising and Licensing transactions, within corporations or with their third parties, are increasingly popular and can also have implications for tax planning. Brand valuations have also been used in supporting negotiations with tax authorities, in supporting court claims for damages in cases of ‘passing off’ or in defending actions of unfair trading and even in the specific use of brands as a securitized asset to back specific borrowing. Irrespective of its purpose, and recognizing that it is only a single measure, it is no exaggeration to say that brand valuation has become an important technique for evaluating businesses. The growing importance of valuation
mirrors the growing importance of brands to the companies that own them. One crucial aspect mentioned is the fiscal implication of charging
international/overseas subsidiaries and third-party licensees a proper royalty fee for the use of brands. Organizations worldwide, particularly universities, have yet to realize that the royalty rates they demand are negligible in comparison to the value of the trademark or service mark asset being licensed. Increasing the royalty rate demanded not only has managerial benefits but also transfer pricing advantages.
This imbalance of power could be greatly improved in two ways [Interbrand [www.interbrand.com/www.brandchannel.com], which is a good example of an institution actively involved in both these areas. Having valued more than 1,000 brands in the past 6 years (with an aggregate value of over $25 billion) Interbrand can with confidence assess service and product brands and compute values and derive royalty rates that stand up to third-party scrutiny. Interbrand is also initiating – with the sponsorship currently of half a dozen major branded goods businesses – a shared database of royalty rates. This will enable companies to source information (protected, of course, by rules of confidentiality) that can help them in justifying higher and more realistic royalty rates.
The managerial and fiscal implication of trademark licensing is profound
and that brand valuation has a key role to play in adding method and
objectivity to an area which in the past has been plagued by doubt and