defining brand value
Brand value is a complex and dynamic concept. Views on the right approach to evaluating and measuring brands will always vary. Therefore, at the outset it is important to note that any calculation is only a snapshot at a particular moment in time. Moreover, the value of a business can vary - sometimes markedly - according to the perspective of the valuer. For example, a change of ownership can impact dramatically on the direction and objectives of a company and hence its performance and value.
Traditionally, there are three approaches to defining business value: replication cost, economic value and net realisable value:
1. what would it cost to replace?
Although there are often practical limits as to the extent to which a company can be replicated, it is often possible to estimate the full replication cost of a business, defined as the costs from growing a start-up company to the point where it can be regarded as an identical operation to the company in question.
2. what value would it generate going forward?
Company directors and managers are primarily concerned with the value of their business on a continuous basis. Without an understanding of the value that they control, they will not be able to evaluate potential business strategies and defend themselves from hostile takeover bids (or even recognise whether they are a potential target). The value of a business as a going concern should be the present value of the company’s future free cash flows, and is known as the economic value.
3. what value would it have to a buyer?
The value of the target to the bidder will largely depend on what that bidder intends to do with it. Where there is a range of bidders, it is certainly possible that they will be place different values on the target, based on what the various bidders perceive to be the synergistic and strategic benefits of acquisition. The net realisable value will be the highest acceptable bid.
As a very general rule, (2) will be less than (1) but (3) can be greater than either, i.e. bid premium reflecting a premium brand and/or break-up value.
current techniques
earnings model – a multiple of accounting profitThe earnings valuation model has as its key aim the estimation of sustainable profits for a company, applied to which is a capitalisation factor in the form of a price-earnings (PE) multiple. For this model to be valid, it must take into account the effect of inflation, which has a confounding effect on profits unless they are all stated in current cost terms. A second pre-requisite for using this model is that an appropriate PE multiple can be derived - this may be by choosing a comparable company, range of companies or sectoral PE. Earnings based valuation models are widely used in both the UK and the USA, and have been since the late 1980s.
Asset model – sale and replacement value of physical assets
The second basic technique is the asset valuation model, which in practice is rarely employed because its focus is on physical assets. This model requires estimation of both the realisable value of assets (i.e. what they could be sold for, either separately or collectively) and the replacement cost of those assets. Since most physical assets have only a useable rather than exchange value, this approach has limited use in projecting the ongoing value of a business.
Present value model – future discounted cash flows
The third technique is the present value model, or DCF valuation model, which is based upon the explicit forecasting of future cash flows. Generally speaking, this process has two elements: forecasting cash flows and calculating an appropriate discount rate based on the appropriate cost of capital.
Theoretically, such forecasting should cover the entire life of the company. To overcome the difficulties this would present, it is customary to make specific forecasts for a set number of years, and then calculate a terminal value at the end of the defined period. The terminal value will be based on a constant (assumed) growth rate from a base cash flow for the year after the terminal period. This procedure allows the calculation of the present value of the company into perpetuity. It is obviously the case that the accuracy of this type of valuation will very much depend on the quality of cash flow and profit forecasts, and on the assumptions made.
For the above valuation techniques, the issue of brand value is non-existent in the case of the physical assets approach and only implicit in the case of the earnings multiple and DCF techniques.
The reality is that for most companies with few if any physical assets , it is the ‘brand’ which determines future earnings and company value.
Intangible assets such as people, processes and information are the key components of brand value that determine the quality of the delivery of a product or service to the customer.
For further insight into how this model would apply to your brand(s) please call us on 020 7317 2770 or email info@valueyourbrand.com to set up a meeting now.
