How to value a brand: part 1

August 25, 2016

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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.

Branding

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:

Advantages of the RFR method:

  • Sound theoretical model for assets that are commonly licensed
  • Easy to use and widely accepted method

Disadvantages of the RFR method:

  • Only applicable to brand assets that are able to be licensed
  • Forecasting a future royalty base is highly subjective and relies on judgment
  • Often difficult to find a truly comparable royalty rate to apply to subject asset
  • Value is extremely sensitive to changes in the royalty rate

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:

  1. Identify the revenue stream associated with the brand over its useful life.
  2. Apply the notional arm’s length royalty rate to the revenue stream.
  3. Subtract the tax deduction from royalty payments to derive an after-tax royalty amount “saved” as a result of owning the asset.
  4. Select an appropriate discount rate to apply to this annual “savings”.
  5. Calculate the net present value of these “savings” and add back the Tax Amortization Benefit (TAB), which is the future tax savings from depreciation of the subject intangible asset.

Next week, we will discuss the Multi-Period Excess Earnings Method, another other common method used to value a brand.




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