A company’s brand is among the most visible and valuable assets it owns. However, despite being so important most brands are off balance sheet. This stands in contrast to tangible assets such as plant and equipment, which despite being far less valuable are regularly valued and studiously recorded in financial accounts. In fact, many investors, advisors, boards and management teams believe brands cannot be valued at all. This is incorrect: brands can be valued but the methodology and factors that need to be considered are very different than for fixed assets.
In this article we explore how brands accumulate value and how this influences the way in which the valuation of a brand is conducted.
How Brands Grow and Accumulate Value
At its inception a new-born brand has little or no value. However, as a company (hopefully) becomes known for providing quality products or services, its brand grows in value. In short: great products build great brands.
Traditionally this process has been long and slow, relying on a gradual accretion of value over decades of carefully managed positive customer experiences – think Procter and Gamble’s 183-year history. However, in recent times “brand velocity” has dramatically increased and highly valuable brands can be created more or less overnight. For example, Kylie Cosmetics, founded by Kylie Jenner in 2015 was worth $800 million barely three years later and the majority of the company’s value is in its brand.
This process of value accretion reveals something about brand valuation: in many (but not all) instances a brand becomes something of a scorecard for the in toto sum of all of the company’s intangible assets (its product designs, its customer experience, its data, its content, its systems and processes etc). In short, as the strength of the underlying intangible assets grow, so does the value of the overarching brand. Think of the brand as the sump in an engine, the place where all the oil drains down to: all value (positive or negative) ultimately ends up in the brand itself.
Put another way brand (regardless of whether it is B2C or B2B) acts as the identifier and communicator to the market of an underlying set of assets and attributes that attract a customer. Strategists often call these “brand values” but the point is they derive not solely from the brand but from a whole host of assets that sit behind the brand. As value accrues or diminishes, the brand itself becomes shorthand for how well these assets are performing.
The old adage “you don’t get fired for buying IBM” sums this up well. The IBM brand stands as a summary and commitment to a whole suite of product attributes: high quality build, commitment to service, leading design, global presence, longevity etc that customers value. Hence the brand values of cutting edge fashion from Prada, the latest smart phone from Apple or enterprise software from IBM are the summation of the other intangible assets such as know-how, systems and process or design that go into the product and are communicated into the market by the short hand of the brand itself.
Think about Coca Cola. When it started there was no value in the brand. It was just another carbonated drink sitting in a fridge. However, over time Coca Cola built its reputation and brand through the development of innovative products, strong supplier and customer relationships, customer loyalty and its ability to keep its recipe (and other trade secrets) under wraps. This was coupled with Coca Cola’s investment in marketing and protecting (via legal recourse) its brand as it built it into one of the most recognised – and valuable – brands in the world.
The Inflexion Point: When a Brand Has Value On Its Own
This process of accretion continues until finally an inflection point is reached: at this stage the brand in and of itself starts to hold value independent of the underlying assets and begins to develop along a new trajectory. Think of brands like Virgin, Disney or Ikea – these have value that is at least partially independent of the company itself and can be monetised in entirely new segments distant from the original products or services that made the brand great. Provided the new segments are influenced by the same brand values, those values translate with the brand into the new area of endeavour. However, poor products or services can do enormous damage to such brands (think Volkswagen’s diesel crisis in Europe) and force them back into expensive brand building activity. If the crisis is severe enough and cuts to the heart of the brand, it can destroy it entirely: witness the annihilation of Arthur Andersen due to its complicity in the Enron fraud – this is the negative and dark side of brand velocity, where brands can rapidly collapse in value. This occurs when the damage done cuts into the core brand values, which in the case of Arthur Anderson was “integrity.”
Valuing a Brand
Brand valuation is the process used to calculate the $ (financial) value of a brand or to determine the amount of money a third party is willing to pay to own or access (license) that brand.
With the previous factors in mind it becomes clear that valuing a brand is not a simple exercise. It is imperative to not simply deal with the brand itself, but to also understand the strengths and risks associated with the intangible assets underlying the brand, and how these contribute (or detract) from its value. Likewise, it is necessary to unpack how much value (if any) sits in the brand as a distinct entity independent of the company’s other assets.
It is also critical to look at not just the brand’s current value but also its potential to generate future value, along with understanding where in its evolution the brand is and what level (up or down) of brand velocity it is experiencing.
When it comes to assessing value, conventional valuation methods tend to significantly under-value intangible assets, particularly brands. This is largely because brand, and other intangible assets, are essentially ignored by modern accounting standards. Intangible assets generally do not make the balance sheet or where they do, they are recorded at cost, and in the case of brand, it is not the cost to build the brand, but simply the cost to register it (which might be a few hundred dollars) or the cost to acquire it. Even when a brand does make the balance sheet and the company does a great job of stewarding the brand (or spends enormous amounts of money growing the brand), it is precluded from appreciating the brand’s value by accounting standards. However, it can be impaired downwards if (for instance) major damage occurs to the company and the brand, for example in the event of a product recall or fraud.
While more complex than a conventional valuation, there are methods of valuing brands that are reliable, accurate and robust. Modern brand valuation methodologies work from the general principles that:
- The brand must be understood as a summation of the value of underlying intangible assets that support that brand. To value a brand without doing so is like valuing a car based purely on its appearance and failing to check if it has an engine.
- A strong brand can deliver an enhanced competitive advantage, which in turn translates into superior market share or margins, and ultimately significantly increases the value of the business.
- The velocity of the brand (up or down) must be understood and considered.
- The value of a brand may well vary between entities; in short it can be worth “X” to one party and party and “5X” to another.
As a consequence of these principles, brand valuation necessarily involves the assessment of a much broader range of factors than are generally included in a traditional valuation, with contextual and qualitative (rather than just quantitative) factors playing a critical role in determining the value of the brand – both in the hands of the current company or in the hands of others.
This results in brand valuations tending to be more expansive and requiring more in-depth analysis of multiple, often non-numerical factors, rather a single or simple numbers-only analysis. Given all the points we have outlined above, this is unsurprising as a brand is ultimately the summation of the values and attributes of a company or product and to assess its value in isolation of these things ignores the very drivers of brand value.
Don’t confuse market uncertainty with value erosion
As a final note, in the current environment where there is significant uncertainty around historical market benchmarks and future forecasts, the analysis of not just financial but also contextual, and qualitative factors (including the strengths and risks of the assets under-pinning the brand) becomes even more critical.
Provided the brand values are strong, brand can exhibit a longevity and resilience that other assets cannot. Unlike many assets, brand value may in fact increase in times of market uncertainty as people turn to brands they recognise and trust. In times of economic distress strong brands can be the most important asset a company owns. Which is why it is more important than ever to manage and value such assets carefully.