The new international 'meta standard' for brand valuation

After nearly twenty years of brand valuation being a controversial issue between marketing and finance directors the International Organization for Standardization has finally produced ISO 10668 to deal with the subject once and for all.

By creating an international standard for brand valuation ISO has not only acknowledged the importance of brands, but also the (perhaps long overdue) need to value them consistently and transparently. Its approach is based on three measurements:

1. Legal analysis

Brand valuation should include an assessment of the legal protection afforded to the brand in all relevant geographical jurisdictions and product or service registration categories. Legal rights vary between legal systems and so need to be carefully considered when forming the brand valuation opinion.

2. Behavioural analysis

The brand valuer must understand the market size and trends, contribution of brand to the purchase decision, attitude of all stakeholder groups to the brand, and all economic benefits conferred on the branded business by the brand.

3. Financial analysis

Financial analysis should include:

• The market approach – a measure of the value by reference to what other purchasers in the market have paid for a similar asset or assets.
• The cost approach – a measure of the value by reference to the cost invested in creating, replacing or reproducing the brand.
• The income approach – a measure of the value by reference to the economic benefits expected to be received over the remaining useful economic life of the brand. This would involve estimating the expected future, after-tax cash flows attributable to the brand, and then discounting them to a present value using an appropriate discount rate.

Various methods are recommended under the income approach:

• The 'royalty relief' method – assumes that the brand is not owned by the branded business but is licensed in from a third party. The value is then be deemed to be the present value of the royalty payments saved by virtue of owning the brand.
• The 'price premium' method – estimates the value of a brand by reference to the price premium it commands over unbranded, weakly branded or generic products or services.
• The 'volume premium' method – estimates the value of a brand by reference to the volume premium that it generates.
• The 'income-split' method – starts with net operating profits and deducts a charge for capital employed in the branded business to arrive at 'economic profits' attributable to total intangible capital employed. Behavioural analysis is then used to identify the percentage contribution of brand to these intangible economic profits.
• The 'multi-period excess earnings' method – values each tangible and intangible asset employed in the branded business (other than the brand) using a variety of valuation approaches and methods depending on what is considered most appropriate to each asset. A charge is then made against earnings for each of these assets, leaving residual earnings attributable to the brand alone.
• The 'incremental cash-flow' method – identifies all cash flows generated by the brand in a business and compares them with similar businesses with no such brand. Cash flows are generated through both increased revenues and reduced costs.

Conclusion

Although each approach has merits, for financial reporting purposes accountants, lawyers and tax practitioners unanimously recommend the 'royalty relief method'. Whichever method is used however, they will all now be completed under the ISO banner, giving credibility to a discipline which in the past was often regarded as a 'black art'.

 

Article reproduced by kind permission of David Haigh, chief executive of Brand Finance plc.

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