Click here to learn about Canada’s COVID-19 Economic Response Plan and support available for individuals and businesses
Further to last week’s blog on valuation concepts in identifiable intangible assets, we continue this week on the valuation of a specific identifiable intangible asset – a company’s brand.
A company’s brand may involve more than just a name. It can also include trademarks, trade logos, websites and URLs, recipes and product formulas, marketing materials and packaging items (trade dress). Given the range of components that make up a brand, there are various methodologies to determine the value of a brand. The two most common methods used for valuing brands are the Relief-from-Royalty Method (RFR) and the Multi-Period Excess Earnings Method (MEEM). Both the RFR and MEEM are income approaches to valuing an asset, and are both widely accepted in the valuation practice.
The income approach is commonly used to value companies that generate income available for distribution to shareholders; it is a prospective valuation approach that involves quantifying the present value of future economic benefits associated with ownership of the business. The estimated future economic benefits that accrue to an owner are stated at present value using a rate of return that is appropriate for the risks associated with realizing those benefits. In part 1 of our discussion on valuing brands, we will focus on the RFR method.
The RFR method is based on the principle that the brand owner is relieved from having to pay licensing royalties to a third party for using the brand. Therefore, the value of the brand is calculated as the present value of future royalty payment (net of the tax benefit) that the owner is relieved from paying by virtue of owning the brand. As such, the RFR method requires forecasting future revenue from branded product sales and applying an assumed market-based royalty rate. Some common advantages and disadvantages of using the RFR method include:
If it is determined that the RFR is the best method to use, the valuator will then value the asset (i.e., brand) by performing the following:
Next week, we will discuss the Multi-Period Excess Earnings Method, another other common method used to value a brand.