It is interesting to appreciate brands have always been considered as
intangible assets, presumably justified on the basis that brands cannot
be seen or touched like a building or plant and machinery. But anyone
who has worked in a brand environment will testify there is nothing more
tangible than the cash flows generated from the companyís brands.
For leading brands these cash flows are resilient, reliable and sustainable
and often the sole basis of a businesses existence. Without them there
is no real business just people in buildings with not a great deal to
Brand valuation in our opinion should not be seen as just a number, the
valuation process itself enriches the user with a far more comprehensive
understanding of how business generate cash flows through an understanding
of their customers, the markets and channels they operate in, the competitive
environment, and operational capability to deliver value and growth.
Brand valuation has been in existence for at least 20 years, and has been
for a large part of this time misunderstood and too often poorly practiced
with the consequence that many in business have been rightly skeptical
about the benefits Brand Valuation brings.
After all from an ongoing management perspective what is the use of knowing
the value of a brand at a point in time if you are not provided with a
brand performance tracking process that helps develop growth strategies,
performance monitoring and resource allocation decisions to optimize shareholder
Critics of brand valuation (and I suppose consequently valuation in general)
point out that any discounted future cash flow model is based upon certain
key assumptions that make such an exercise very subjective and of little
benefit, such as future growth rates, discount rates, profitability etc.
But this criticism is pretty pointless as most investment decisions are
based upon future cash flow expectations and returns and we have a requirement
to continually improve our forecasting capability and understanding.
Besides it should be appreciated that strong brands provide very reliable
steady cash flows and I would argue very strongly that you can far more
accurately value a brand as opposed to a commercial building (based on
future rental expectations).
The Development of Brand Valuation
The problem with brand valuation in the past is that generally brand valuation
grew out of business valuation and has been practiced by accounting firms
who have first class technical knowledge in terms of justifying a discount
rate, appropriate tax rates etc but do not possess the commercial experience
or background knowledge to fully appreciate and understand how brands
operate from the perspective of consumers and markets and retail distribution
in a competitive context. Without this understanding of the real world
built into a valuation process any forecasts going forward will be based
on guess work without real substance built into the guts of the analysis.
And as a direct consequence provide no genuine benefit to business or
Having said that brand valuation methodologies have been developed and
improved considerably in recent times, and is now starting to be recognized
and used as a leading edge business tool.But only now is Brand Valuation
and Intangible Asset Valuation being taken seriously mostly due to United
States financial reporting standards requiring acquired intangibles which
can be separately identified and have separate economic lives to be valued
and put on the balance sheet. International accounting standards will
require UK (and other countries adopting IASís) public companies to do
the same and this will be effective from January 2005. Additionally these
intangibles require annual impairment testing to make sure their values
have not diminished. If they diminish in value then a write off to the
profit and loss account is required. Not a pleasant circumstance for company
directors to explain to their stakeholders. For example in the United
States under the new accounting standards AOL Time Warner has written
off $ 54 billion and Worldcom $ 50 billion dollars.
Even so from the perspective of users of accounts these developments will
not provide the full picture yet as only acquired intangibles need to
be valued and put on the balance sheet, and only acquired intangibles
after the new accounting standards come into force.
All those internally generated brands and brands purchased before the
new standards apply, which will be the vast majority will not have to
be put on the balance sheet.
But this is a positive development and in due course we should expect
to see an interest in putting all internally developed and acquired brands
on the balance sheet. Only then can the balance sheet be expected to reflect
the real value of the business. This would reveal the real value of the
assets under the management of company directors and make interesting
reading from the perspective of understanding real returns on assets employed.
Read the full article: Click