What Is Brand Valuation?
Brand valuation refers to the computation of a company’s financial worth, I.e., the price that a prospective buyer will willingly pay for its acquisition. It assesses the business’s net worth with respect to all its tangible and intangible assets. It allows an investor to measure their potential return while considering an investment.
Brand value is the total of a company’s brand equity, financial performance, customer perception, goodwill, etc. Knowing a company’s brand valuation during tax planning, commercial valuation, financial reporting, licensing, financing, mergers and acquisition, and strategic decision-making is essential to avoid losses and risks.
Table of contents
- Brand valuation is a process of a company’s net worth analysis from the company’s perspective. It considers all the tangible and intangible assets of the firm for computation.
- It is simply the sum a third party can happily pay to acquire a brand.
- There are multiple reasons behind the determination of brand value, including financial reporting, licensing, commercial valuation, tax planning, brand repositioning, and merger and acquisition.
- Some of the prominent methods of brand valuation are the cost-based approach, market-based approach, income-based approach, and formulary approach.
Brand Valuation Explained
A brand is represented by its name, logo, motto, visuals, tagline, etc. However, the brand image is built over the period through its patents, goodwill, trademarks, software, formula, techniques, copyrights, and other intangible assets along with all the tangible assets. Brand asset valuation, thus, determines how far and how much a company has achieved in this journey. Earlier, brand valuation was all about brand equity and the financial management of the business.
But, the present scenario has a broader perspective on brand valuation. It is measured in terms of three parameters, I.e., financial, legal, and behavioral analysis. The financial analysis of a firm is performed through various approaches based on cost, market, and income, which we will discuss further. The legal analysis ensures that the various intangible assets like trademarks, designs, copyrights, and patents are registered, and the firm can claim property rights over them. Behavioral evaluation deals with the market trend, consumer perspective, brand recognition, etc.
As we discuss brand valuation, we are concerned with the business’s financial analysis. A brand valuation approach must fulfill the basic prerequisites like objectivity, clarity, reliability, and dependability. In a broader sense, the following are the four different methods of determining the brand value of a firm:
#1 – Cost-Based Approach
This approach focuses on the cost incurred in developing a brand or on its replacement. Such methods are popularly used in Aaker and Keller models. The following are the different cost-based methods:
- Customer preference model,
- Replacement cost method,
- Historical cost method, and
- Use of conversion model.
#2 – Market-Based Approach
As the name suggests, this method determines the brand valuation through the market standing of a brand, I.e., the highest value that a buyer is willing to offer and the seller is ready to accept when the brand is sold in the market. Some of the prevailing market-based methods are
- Brand equity is based on the equity evaluation method,
- The comparable approach or the brand sale comparison method, and
- The residual method.
#3 – Income-Based Approach
Also known as the economic use approach, it is an evaluation model that figures out the future net earnings of the brand and, thus, determines its current brand value. It is a crucial approach that helps investors identify the business’s future potential. The underlying methods include:
- Price premium method,
- Royalty relief method,
- Differential of price-to-sale ratios method,
- Brand equity based on discounted cash flow, and
- Brand equity is based on differences in return on investment, return on assets, and economic value added.
#4 – Formulary Approach
It is a widely used method in business, where the company determines the brand asset valuation after consulting with the other organization. Some common practices under this model are brand equity ten, interbrand approach, brand finance limited, and finance world method.
Check out these examples to get a better idea:
Daniel wants to invest in the company Amacon but is unsure about the potential returns or risks involved. So he studies the brand value of a company to aid his decision. He discovers that the company has been doing well in its financial performance, offering scope for growth and exploring new horizons in the market which might be profitable in the future. He thus decides to invest in the company.
According to a report of Wire19, published on February 28, 2023, Verizon managed to secure the highest brand valuation worldwide in the telecom industry with a figure of $67.4 billion. Although the company faced a slight downfall in its brand value, it remained the most valuable telecom brand for the last four years. In this race, Verizon is followed by Deutsche Telekom, with a $62.9 billion brand value.
Advantages And Disadvantages
The brand valuation approach helps the different parties, I.e., the investors, financiers, customers, and staff, in decision-making. Thus, in a business, brand valuation is crucial for the following reasons:
- First, it is essential to gauge a company’s financial performance.
- Second, it helps the company understand its market standing and competitive advantage and look for growth opportunities.
- Third, it aids the management in taking crucial strategic decisions related to the business portfolio.
- Finally, it measures the correct worth of the firm at the time of merger and acquisition.
- Investment in a brand adds to its value. Therefore, brand valuation helps to optimize such investments to build brand equity.
- Further, it builds a framework and provides a direction to the marketing team to strengthen the brand position in the market.
- It leads to brand empowerment in the long run.
The process of brand valuation has various limitations, as discussed below:
- It accounts for intangible assets like intellectual property rights, patents, and trademarks which are difficult to measure in terms of money.
- The prevailing valuation methods aren’t widely recognized to provide accurate results.
- These approaches don’t fulfill the basic requirements of analysis, I.e., reliability, objectivity, and dependability.
- Such an evaluation must incorporate the corporate vision and potential of the business.
- On the one hand, the financial models ignore brand planning; on the other hand, the buyer-situated models don’t regard monetary factors. Thus, both are unsuitable for decision-making when undertaken individually.
Frequently Asked Questions (FAQs)
There are numerous methods of determining a firm’s brand value; one such approach is the differential price-to-sale ratios method. The formula is:
The three crucial components of brand valuation are:
1. Financial analysis through cost-based, income-based, market-based, and formulary approach;
2. Legal evaluation for ownership right of intangible assets through registration and licensing;
3. Behavioral analysis, including consumer perception, market trends, competition, etc.
Brand equity is driven by the customer’s perception, I.e., consumer satisfaction, brand recognition, brand association, and consumer loyalty. However, brand valuation is the evaluation of a company’s net worth with the help of the company’s tangible and intangible assets.
Moreover, brand equity is achieved through perceived quality, brand loyalty, brand awareness, and brand associations. On the contrary, brand valuation involves financial, legal, and behavioral analysis.
This article has been a guide to what is Brand Valuation. Here, we explain its methods, examples, approaches, advantages, and disadvantages. You may also find some useful articles here –