In Chapter 25 of the Pablo Fernandez e-book on valuation (Valuation and Common Sense), titled Valuation of Brands and Intellectual Capital, he lists the methods that are used to value brands. Fernandez is the PWC Professor of Finance at the University of Navarra - IESE Business School, and IP Value Wire will explore his conclusions as to the limitations with these methods at a later date.
Methods used to value brands
1. The market value of the company’s shares;
2. The difference between the market value and book value of the company’s shares (market value added). Other firms quantify the brand’s value as the difference between the shares’ market value and its adjusted book value or adjusted net worth (this difference is called goodwill);
3. The difference between the market value and the book value of the company’s shares minus the management team’s managerial expertise (intellectual capital);
4. The brand’s replacement value;
4.1. Present value of the historic investment in marketing and promotion;
4.2. Advertising investment required to achieve the present level of brand recognition;
5. The difference between the value of the branded company and that of another similar company that sold unbranded products (generic products or private labels). To quantify this difference, several authors propose different methods:
5.1. Present value of the price premium (with respect to a private label) paid by customers for that brand;
5.2. Present value of the extra volume (with respect to a private label) due to the brand;
5.3. The sum of 5.1 + 5.2;
5.4. The sum in 5.3 less all-differential, brand-specific expenses and investments. Fernandez highlights this as the most correct method, from a conceptual viewpoint. However, it is very difficult to reliably define the differential parameters between the branded and unbranded product, that is, the differential price, volume, product costs, overhead expenses, investments, sales and advertising activities, etc. EPM Communications performs store check services on consulting basis to help organizations get a handle on this valuation.
5.5. The difference between the [price/sales] ratios of the branded company and the unbranded company multiplied by the company’s sales. This method was used by Damodaran in his now famous valuations of the Kellogg and Coca-Cola brands.
Valuators need to make some sense of this, and to help Mike Pellegrino of Pellegrino and Associates will join with Ira Mayer of EPM Communications on March 21st for a BVR webinar on Valuing Brands. Mark your calendars.