Brand Value & Valuation of a Business

Brand Value- Meaning & Definition

In the literal sense, branding is the process of creation of a brand and could be defined as the act of giving a company a particular design or symbol to advertise its products and services not too many years ago, this used to be a close description of branding as per the consensus. But, things have changed today. Today brands are not just restricted to only marketing functions or tactics for maximization of profits of a start-up business but have become an integral part of consumers. Since the emergence of concepts such as consumer awareness and globalization in the new world economy, brands have a quintessential role to play. Rather than being just a financial number, it infers to the names, terms, signs, symbols, and logos that identify goods, services, and identity of start-ups and has multiple roles to play for a start-up.

It is a measure of several factors such as customer loyalty and the ability of a brand to keep offering novel & latest products & technology to create a connection with those who give it a premium. The main aim & objective of creating a brand is to create a memorable impression on consumers by allowing customers & clients to know what could be expected from your business. It is a way in which a start-up business could prove itself different from its customers and describes how its offering helps the customers to make a better choice.

Difference between Brand Value & Brand Equity-

Brand Valuation could be defined as the process of calculating the value of a brand or the amount of money another organization is willing to pay for purchasing/acquiring the business or the likely financial value of the brand. Though the concepts of brand value & brand equity sound similar and are even used interchangeably, there are enough differences between the two.

To put it simply, while brand equity works based on the perspective of a consumer, the value of a brand is more based on the perspective of the business organization, which means that the concept of brand equity is way broader than the concept of brand value for a start-up. Therefore, it should always be kept in mind that positive brand equity may not always indicate positive brand equity. Other than this, provided below are some of the differences between the two-

Importance of branding for a start-ups business

Branding has a major role to play in the success of every start-up business. Regardless of the size of the business or the marketing (B2B or B2C), profitable or non-profitable, the requirement of a brand could not be dispensed with. It helps to convey your message and unique attributes to your target audience, differentiate from your rivals and enjoy a competitive edge in a crowded marketplace. Even then, if you believe your start-up doesn’t need branding, maybe you need to rethink your choice. If you want your customers to buy your products or services, you will need to give attention to your branding decisions.

There are six advantages of branding for a start-up business-

• Branding offers businesses a distinct new identity;
• Branding allows the start-up to remain relevant for its longer presence
• It supports a business to increase visibility
• Branding improves the traction of the business;
• Helps to create a strong image in the minds of customers
• Helps to resolve the issues of your clients & customers helping ultimately to improve business performance.

To explain it further, a brand has three functions for a start-up business -navigation, reassurance, and engagement. In other words, when the brands help the customers to pick items from the bewildering array of alternatives available in the market while reassurance warrants that they communicate those intrinsic qualities of any product or service to assure consumers at the point of purchase while engagement connects distinctive imagery and associations of the brand with customers to encourage distinct identification.

Therefore, it could be assumed that brands do carry a value for the start-up organization and it is necessary to carry out their valuation.

Importance of brand valuation for businesses & start-ups-

The process of brand valuation is not only of crucial importance for the business brand of the start-up but also of primary importance to the business of the start-up but also for improvising the image of the start-up business, increasing the value of the business, and ascertaining accuracy in cases of mergers and acquisitions related transactions.

There could be various purposes and benefits associated with a brand valuation report that could be utilized by the start-ups for balance sheet reporting, tax planning, litigation, securitization, licensing, mergers & acquisitions transactions, and investor relations and commercial valuation which is effective for brand architecture, portfolio management, market strategy, budget allocation, and brand scorecards. However, this doesn’t mean that it is any easier for start-ups to determine their worth, especially for the start-ups running on tight budgets to explain the importance of their brand. The very idea of the brand being an intangible asset makes it difficult to assess its value correctly and further explaining its value to a start-up company seems even more challenging. Thus, the brand valuation would be helpful for the purposes of strategic brand management and financial transactions.

Methods & Approaches towards Valuation of a Brand

There are situations in which a start-up has to consider brand valuation rather than the valuation of a business. In such cases, it becomes difficult to define the brand, what portion of cash flows are being generated due to a particular brand, and what is actual; valuation of the brand is without the existence of such brand. But before doing this, two questions are needed to be asked-

• What is being valued- either the trademark, the brand, or the branded business; and
• What is the purpose of such valuation?

There is no one absolute method to find out the valuation of a brand that has given rise to multiple approaches with each of them having its pros and cons-

I. Brand valuation based on Market Research

These models are based primarily on behavioral analysis in the market to determine the performance of brands. These methods attempt to study the behavior and attitudes of consumers that impact the economic performance of brands as they try to explain, interpret, and measure consumer perceptions that influence customers’ purchase behavior. However, this approach fails to prove the link between certain marketing indicators and the financial performance of brands due to the variables analyzed are not combined into an economic model and thus are incapable to establish the economic value of brands.

II. Brand valuation based on Financial Models

Under this category, various existing methods attempt to incorporate the market variables in a financial model that allows the measurement of the brand performance in financial terms. Some of the popular methods include-

1. Historical Costs – This method attempts to estimate and define the value of a brand as the aggregate sum of all historical and replacement costs invested in the business to bring the value of the brand to the current market level ( total of all costs incurred for the development of brand such as development costs, marketing & advertising, promotional events& activities, etc. ). This method of valuation is generally used in the initial phases of a start-up brand creation unless specific market applications and benefits cannot be identified. However, the limitations of this method include difficulties faced to classify costs as either marketing costs or subsequent amortization of marketing costs as a percentage of sales over the brand’s expected life. This method fails to establish the direct correlation between the financial investment made by the start-up in the establishment of the brand and the value-added to it by the brand.
2. Replacement Cost Method– The Replacement Cost Method values the brand by taking into account such expenditures and investments necessary to replace the brand with the latest brand having an equal utility to the company. Though it is comparatively easier to calculate the brand valuation through this method, it fails to consider the success & image of an established brand. Further, the first brand in a market always has an expected advantage over the other brands as they avoid clutter and with each new attempt, the probability of success for each new brand diminishes.
3. Price premiums Method– In this method, the value of the brand is calculated as the net value of the price premiums that any branded product would have on a similar product or service at present. However, since most of the branded products wish to attain higher demands rather than just premiums over price, it becomes difficult to obtain generic product information which is comparable to the branded product to be valued.
4. Discounted Cash Flow– In this method, Cash flow acts as a key component for determining the value of a brand as it takes into account factors like an increase in working capital & and fixed asset investments. It attempts to assess the amounts of future cash flows to be generated by the brand in near future.
5. Royalty Relief Method- According to this method, the valuer first needs to determine a base for the calculation of value (based on a percentage of turnover, net sales or another base, or several units, etc.) then fix other attributes such as the appropriate royalty rate and determine a growth rate, expected life and discount rate for the brand. This is usually preferred by the tax authorities and has an edge of being industry-specific.
6. Differential Price to Sales Ratio Method- This method will analyze the brand value of the business as the difference between the projected price to sales ratio for a start-up with a brand and the price to sales ratio for an unbranded start-up business which will be multiplied by the sales of the branded company.
7. Residual Method- The residual value is received after the market capitalization is subtracted from the net asset value of a brand. It also takes into account other variable factors such as risk-free interest rate, current exercise price, the variance of the asset, time of expiration of the option, and value of the underlying asset, etc.
8. Economic Value Approach-This method is based on the financial measures provided through the available market and financial information of the brand subject to valuation. This method of valuation was developed in the year 1988 and went on to become the most accepted method in the market for brand valuation. This method is based on the following principles-

i. Principle of Marketing- This principle states brands work within a business. Thus, consumer demand gets converted into purchasing, price, and frequency volumes and brands ensure long-term demand through loyalty and product repurchase.

ii. Financial Principle- This principle provides the brand value as the net present value of expected future earnings and the future earnings of a brand could be identified and discounted at an appropriate rate which replicates the risk that those gains will be realized. This Economic Value approach is fulfilled in these five stages-

a. Market segmentation – The concerned brand is distributed into segments and each brand is valued in each market segment and the total sum of the total valuation of all the segments constitutes the final value of the brand.

b. Financial analysis- Sales revenues and the profits of the intangibles created by the concerned brand in each segment are recognized and projected. Then such intangible gains are demarcated as brand sales revenue minus operating costs, taxes and capital charges, etc.

c. Demand analysis – It attempts to determine and define the role of a brand in achieving demand for the products and services being offered in its market of operation and further determines the proportion of the intangible profits attributable to each brand and measured by an indicator called ” brand”.

d. SWOT Analysis- Under this, the competitive strengths and weaknesses are determined to calculate an appropriate discount rate that could reflect the risk profile of expected future earnings (measured by an indicator called “Brand Strength Score”) which allows the calculation of the brand valuation. It includes factors like competitor’s analysis, brand market structure, stability, leadership position, growth trends, geographical coverage and legal protection of the brand, etc.

e. Calculation of brand value- Finally, the value of a brand is calculated as the current value of the projected intangible gains of the concerned brand discounted by the Discount rate brand valuation. Such net brand value at present includes the explicit projection period and the value beyond that period representing the ability of the brand to continue generating profits in the future for the start-up.

Conclusion

Despite the utter significance of the valuation of a brand for any start-up, the process of valuation is never straightforward and even trickier in its early stages of development and especially for the start-ups with little or no revenue or profits and less-than-certain futures. Still, the process of valuation is more frequent for start-ups from the point of view of management and transactions like mergers & acquisitions.

In such situations generally, the economic value approach is a useful tool in the financial management of brands. Regardless of the alterations in focus on brand valuation and the difficulty involved in the determination of the cash flows attributable to a certain brand by the start-up, the process of the brand valuation process is also useful for the internal management of the business as it helps them to identify and find out the brand value drivers when comparing them with similar brands in the market or as a measure of accomplishment of the company’s goals in a given period.