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How to value a brand: part 2

August 31, 2016

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In continuation of our discussion in the valuation of brands, we focus our attention this week on the “Multi-Period Excess Earnings Method” (MEEM). If you missed our blog last week, you can access it here.

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As previously noted, a company’s brand may involve more than just a name; some other examples include trademarks, trade logos, websites and URLs, recipes and product formulas, marketing materials and packaging items (trade dress). Given the possible range of components that make up a brand, this gives rise to various valuation methodologies used in determining 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 of which are widely used income-based valuation approaches.
MEEM is a variation of the discounted cash flow method and is often used when it is difficult to obtain a direct measure of the future economic benefits associated with a particular intangible asset. As such, the steps to MEEM are as follows:

  1. Calculate the forecasted after-tax cash flows related to sales of branded products.
  2. Deduct contributory asset charges for all other assets (e.g., working capital, capital assets, employee workforce, other intangible assets) used to generate income.
  3. The residual cash flow (after the contributory asset charges) is then discounted using an appropriate discount rate to obtain a net present value.
  4. Add the “Tax Amortization Benefit” (TAB) to the net present value of the cash flow to obtain the value of the brand. The TAB represents the future tax savings from the ability to write-off the brand asset for tax purposes.

Some common advantages and disadvantages of using the MEEM method are as follows:

Advantages

  • Sound theoretical model based on expected cash flow and associated investment risk.
  • Widely accepted method for valuing brands and other similar intangible assets.

Disadvantages

  • The brand asset may not have a discrete cash flow that is readily apparent (it may be difficult to attribute a distinct cash flow to the brand).
  • Estimating future expenses unique to the brand is difficult.
  •  It is often difficult to identify the contributory asset charges when contributory assets include other intangible assets.
  • Deriving a discount rate to present value the brand cash flows is subjective.

As in all cases, the valuation of a brand requires significant judgment and experience in order to attain a meaningful result. In addition, the valuator should always consider other factors that may impact the value of the brand and reflect this in their valuation.

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