Insights into valuation of underwear brands

BVWireIssue #169-2
October 12, 2016

The underwear sector is a perfect example of market-based third-party royalty rates for trademarks often not fitting into a valuation for long-term ownership. Although often nonpublished, typical trademark royalty rates for underwear (includes woven bras, lingerie, and sleepwear) range between 5% and 12% depending on the brand. However, such royalty rates are often too high to pass the profit split test in business combinations. Underwear is a mature industry showing rather low profitability, growth prospects, and purchase price multiples.

Mentionables: A peer group analysis by MARKABLES for underwear finds average sales to enterprise value ratios of little less than 1.0x (see chart below). Underwear trademarks account for approximately 30% of enterprise value. This translates into average royalty rates for underwear trademarks of about 3% on revenues, considerably lower than typical royalty rates signed in license agreements. Valuing underwear trademarks at market-based royalty rates and indefinite lives would throw a purchase price allocation way out of whack.

There are two key findings here. First, a licensee of a brand or trademark may pay a high price (royalty rate) in a low-risk (short-term, ancillary business) setting that the licensee could not afford and would not accept in the long run. In other words, arm’s-length royalty rates tend to overstate the long-term value of an asset calculated at full cost and risk. And second, the relief-from-royalty method based on comparable uncontrolled transactions must pass a profitability (or profit split) check to avoid overstatement of value.

MARKABLES (Switzerland) has a database of over 8,200 global trademark valuations published in financial reporting documents of listed companies.

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