ITMA 322 APRIL 2005

Features
What’s in a Brand? Brand Valuation
Neil Coulson
“Groupe Danone is recognised for the dynamism and
strength of its brands”
(www.danone.com)
“We cherish our brands; we are creative and courageous in
pursuing their full potential”
(www.diageo.com)
Brands are big business. Brand owners recognise that
much of the value of their company exists in their
brands and their intangible assets. According to
research undertaken by PricewaterhouseCoopers,
intangible assets and goodwill accounted for up to
74% of the average purchase price of companies in
20031 .
The trade mark
Most brands are protected and underpinned by registered
trade marks and the trade mark itself is a valuable
asset, forming part of the wider concept of intangible
assets or “brand value”. The value of the brand
to a company will be reflected not just in its trade
mark portfolio, which is vital as the base unit of protection,
but also in less easily quantifiable terms such
as market perception and positioning. The two exemplars
quoted above, Diageo and Groupe Danone,
advertise on their websites that not only do they protect
of their brands — both will have extensive portfolios
with sophisticated, proactive management — but
also that they look to extend their brands to their full
value and potential. Their approach is typical of all
successful brand-owning companies. To do this effectively,
though, companies need to quantify the
abstract concept of the brand. This enables effective
management, development and the addition of corporate
value.
Trade marks are vital for the protection of brand
value and, almost invariably, brand development will
centre on promotion of the trade mark or marks
(which may or may not be the name of the product)
in the mind of the consumer. The role of the trade
mark arises from its very nature. Its function is to distinguish
the goods or services of one undertaking
from those of other undertakings, thereby indicating
the origin of those goods or services to the consumer.
The market distinction created by a strong trade mark
by which the consumer recognises the brand underpins
the performance of the brand (as a general concept)
in national and international markets.
Brand reputation
The value of a brand depends to a large extent on its
reputation, which is important both offensively in the
generation of sales (and perhaps expansion into new
markets) and defensively in the protection of the
brand from encroachment by third parties. In litigation
to protect investment in a brand, either for trade
mark infringement or passing off, reputation can play
a key role. Indeed, in a passing off action, reputation
is the first requirement of Lord Oliver’s classic trinity
of reputation, misrepresentation and damage that he
set out in the Jif Lemon case. Active management of
the brand contributes to the strengthening of this reputation.
Brand valuation
So we have the trade mark and we have established a
reputation in the market. But how do the trade mark
and other intangibles together create brand value?
And how is it measured? Goodwill, market perception
and position, pricing, quality — all these factors
combine with a strong trade mark to drive the
brand’s development and value. But, the presence of
intangibles creates valuation questions beyond those
of valuing the trade mark per se. They are, after all,
“intangibles”. Why should you value your brand?
How can it be done? What impact does the brand
value have on the brand owner’s business?
Specialist valuation groups in accountancy and
finance practices offer brand valuation services.
Indicators of brand value can be derived from the cost
of creation of the brand (including the cost of development
of the trade mark, although this generally
bears little relation to current value); comparative
market analysis; royalty streams (actual or potential)
and economic use. All are useful indicators, none on
its own provides the complete answer and, as we are
dealing with intangible assets, there will always be a
certain degree of value judgment. However, as precise
a valuation as possible provides key information for a
company’s internal management of its brands and in
its external relations with its shareholders and potential
investors. Further, as its brands can be a company’s
main assets, an accurate valuation is essential for
the purposes of a merger or acquisition. The concept
of brand value in general and quantification of it
needs to be communicated to a company’s internal
and external market.
Active and effective brand management
Key performance indicators assist in a valuation
process and provide effective management tools for a
company’s brand team. Advertising and promotion
constitutes a large proportion of spend and a correlation
of the amount spent on advertising and promotion
to overall brand value can facilitate a precise
evaluation of the success or otherwise of the advertising
and promotional activity to the brand value. This
in turn can drive budget allocation, but above all it
means that advertising and promotional spend is seen
as an asset value rather than simply an expense cost.
External market analysis of the impact of either specific
campaigns or corporate advertising in general on
brand value (most likely to be measured through
sales) contributes valuable data to the brand manager
and this data can be converted into financial informa-
Continued on page 10
December 2005 ITMA Review 9