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Understanding Brand Equity and Valuation
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by Stuart Whitwell 20 the future of Branding


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 do.

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 value.

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 investors alike.

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.

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