According to top brand valuation firm Interbrand, brand valuation is based on an assessment of what the value is today of the earnings or cash flow the brand is expected to generate in the future. To estimate brand value, it is necessary to:
1. Identify the true earnings that can be attributed strictly to the brand and
2. Capitalize the earnings by applying a multiple to historic earnings as a discount ate to future cash flow.
Interband maintains that not all of a brandâ€™s profitability can necessarily be applied to the valuation of that brand. A brand may essentially be a commodity or derive much of its profitability from non-brand-related considerations (like its distribution system). Elements of profitability that do not result from the brandâ€™s identity must therefore be excluded. Because the valuation may be adversely affected by using a single yearâ€™s profit, Interbrand uses a three-year weighted average of historical profit.
Brand earnings are calculated by subtracting a number of items from brand sales:
* Costs of brand sales.
* Marketing costs.
* Variable and fixed overheads including depreciation and central overhead allocation.
* Remuneration of capital charge– a 5%-10% rental charge on the replacement value of the capital employed in the line of production and
To adjust these earnings, Interbrand conducts an in-depth assessment of brand strength. The assessment involves a detailed review of the brand, its positioning, the market in which it operates, competition, past performance, future plans, and risks to the brand. Interbrand administers a detailed questionnaire to collect the information from managers and customers. It also examines annual reports and other printed materials and even conducts inspection visits to distributors and retail outlets.
Brand strength is a composite of seven weighted factors, each of which is scored according to established guidelines. The resulting total, known as the brand strength score, is expressed as a percentage. This score is converted to an earnings multiple to be used against the brand-related profits. Certain adjustments are made to create weighted average of post-tax brand profitability against which the brand multiplier is applied. Interbrand makes the comparison between the reciprocal of these multipliers and typical discount rates or interest rates. A so-called perfect brand with a brand strength score of 100 would have a discount rate of 5 percent (1 over 20) which would be the typical return on a fairly low risk investment; a weaker brand with a lower multiplier would have a higher discount rate to reflect the greater risk.
Interbrand Brand Strength Formula (Weights in Parentheses)
1. Leadership (25%): The brandâ€™s ability to influence its market and be a dominant force with a strong market share such that it can set price points, command distribution, and resist competitive invasions. A brand that leads its market or market sector is a more stable and valuable property than a brand lower down the order.
2. Stability (15%): The ability of the brand to survive over a long period of time based on consumer loyalty and past history. Long established brands that have become part of the â€œfabricâ€? of their markets are particularly valuable.
3. Market (10%): The brandâ€™s trading environment in terms in terms of growth prospects, volatility and barriers to entry. Brands in markets such as foods, drinks, and publishing are intrinsically more valuable than brands in, for example, high-tech or clothing areas, as the latter markets are more vulnerable to technological or fashion changes.
4. Geographic Spread (25%): The ability of the brand to cross geographic and cultural borders. Brands that are international are inherently more valuable that national or regional brands, due in part to their economies of scale.
5. Trend (10%): The ongoing direction and ability of the brand to remain contemporary and relevant to consumers.
6. Support (10%): The amount and consistency of marketing and communication activity. Those brand names that have received consistent investment and focused support must be regarded as more valuable than those that have not. While the amount spent in supporting a brand is important, the quality of this support is equally significant.
7. Protection (5%): The brand ownerâ€™s legal titles. A registered trademark is a statutory monopoly in a name, device, or in a combination of these two. Other protection may exist in common law, at least in certain countries. The strength and breadth of the brandâ€™s protection is critical in assessing its worth.