At its essence, a brand is what makes your company your company and includes the quality, functionality, pricing, and packaging, of your products and services, trademarks, logos, slogans, color schemes, as well as all associated communications, such as advertising, marketing, promotion, and your website. Properly cultivated, your brand is an intangible asset with tremendous value, based on established goodwill in the marketplace.
In 2017, Forbes reported that the top 5 most valuable brands were Apple ($170 Billion); Google ($101.8 Billion); Microsoft ($87 Billion); Facebook ($73.5 Billion); and Coca Cola ($56.4 Billion).
But how is brand value actually measured? There are three primary approaches to brand valuation:
(1) Cost-Based Valuation: The brand is valued using the sum of individual costs or values of brand assets and liabilities. This method measures the accumulation of costs in building your brand since inception, e.g., expenditures for advertising, marketing and promotion, legal costs for brand licensing and trademark registration. The fundamental principal behind the cost approach is that a buyer would not pay more for an asset than it would cost them to build an equivalent.
(2) Market Approach: This method assigns a value based on comparisons of transactions, such as brand license agreements or acquisitions, involving similar assets, for companies offering comparable products on the same scale. The Market Approach is appropriate when the asset is not necessarily unique and there are sufficient comparable transactions in the marketplace. However, given that most brands are unique in some way, the Market Approach is not widely used.
(3) Income Approach: This method measures the value of a brand by referencing the present value of the economic benefits expected to receive over the rest of the brand’s life, whether through sales of products or services, revenue from brand licensing, etc. The theory behind the Income Approach is that a brand’s value stems from its ability to generate profit for its existing or potential new owners. There are various recognized methods for determining the present value of the economic benefits under the Income Approach.
No matter which valuation approach is used, accurately determining the value of a brand is extremely difficult. Each business is unique, and will likely have different expectations in terms of the longevity of the brand, organizational capacity, competition and other risks in the marketplace, opportunities for growth, and sustainability of profits. Nevertheless, businesses may need to value their brands, such as to find a buyer, to value the brand in the company’s balance sheet, to attract or provide information to investors, to use the brand as security for a loan, or for tax purposes. Brand valuation is a useful tool that is used in a variety of business transactions.
If you are interested in a brand valuation, Evoke Law can refer you to companies that specialize in intellectual property valuations.