When selling a company, business owners try to value different elements of their businesses. This includes assets, cash flows, and business relationships. Together they help to determine an appropriate sale price. In reviewing elements of their businesses that have value, one question that business owners often ask is, “What is my company’s brand worth?”.
The frequent references in business analyses to a company’s brand value may make it seem as through brand value is relatively straightforward to calculate. However, determining the value of a brand can be very challenging due to two key reasons. The first is the difficulty of defining exactly what a company’s brand is. The second is the difficulty of quantifying brand value, particularly in a way that buyers will accept.
Despite these difficulties, brands are without question a very important part of a company’s overall value. Understanding what brands are and how they can be valued can greatly broaden and strengthen the perspective and position of a seller of a company in the company sale negotiating process.
Understanding what a company brand is and how it is valued can greatly strengthen the perspective and position of a company seller in the company sale process.
What is a Company’s Brand?
A company’s brand, in the very simplest terms, is what makes the company unique and sets it apart from competitors. A company’s corporate individuality often is related to four types of associations in the minds of consumers or the market.
A company’s brand is what makes a company unique and sets it apart from competitors.
Brand elements
The first element of a company’s brand is its association in the mind of consumers or the market with certain visual attributes. This is often largely comprised of a company’s trademark or logo. However, a company’s visual corporate identity can also be defined by products, containers or wrapping that may be visually unique. The “golden arches” of McDonald’s, for example, is a highly distinctive and recognizable feature of many McDonald’s restaurants.
The second element of a company’s brand is its association with certain products or services. The stronger a brand is, the more a consumer will think of a company’s products or services when he or she hears or sees a reference to a brand. For example, when people hear the brand “Apple” they often automatically think of the iPhone.
The third element of a company’s brand is its association with certain attributes of a product or service. For example, for a company in the luxury hotel segment, a strong brand has the ability to convey a greater sense of luxury. For a company that is competing in a discount product segment, a strong brand has the ability to convey a better value for price than its competitors.
The fourth element of a company’s brand is how the market perceives its operations, values, and treatment of employees. A company’s brand that strongly reflects these values can significantly influence consumer purchasing decisions when customers share those values.
Company Brand Valuation Approaches
Given how important a brand is to a company, the practical question is, how can it be valued? While there can be many variations on brand valuation techniques, brand valuation approaches are often divided into three categories.
Three common ways to value brands are the cost approach, the market approach and the income approach.
Cost Approach
The cost approach values a brand based on the amounts that were expended to create the brand. This can include amounts that were expended on brand advisors, trademark and logo designs, websites, social media outreach programs, advertising and community activities.
While brand development costs are easy to quantify, two companies spending the same can achieve very different results. Cost-based approaches often provide a limited picture of a company’s brand value. Sales, performance, and market position may vary significantly.
Market Approach
The second approach is the market approach. This approach derives the value of a brand through a reference to other companies in the market. One way to do this would be try to derive the value of a brand by considering the value of a similar brand. However, in practice this can be difficult to do because every company brand is by definition unique.
A variant of this approach compares company performance and finances to determine how much value comes from the company’s brand. For example, if one company sells coffee for $3.00 and another for $5.00, assuming all else equal, the higher price reflects the strength of the latter company’s brand.
Of course the relationship between certain financial drivers, such as product price, and brand value have to be considered very carefully. A company may hold price down for certain periods of time to try to gain additional market share.
Income Approach
The third approach is the income approach. It derives the value of a brand based on the value of the income or cash flows of a company that are attributable to its brand. If it costs two companies the same amount to produce a cup of coffee, and one company has free cash flows that are 10% higher than the other company, it could be argued that the present value of the difference between the two sets of cash flows represents the value of the company’s brand.
Conclusion
Brand valuation is more art than science, as the company’s brand is intangible and uniquely difficult to value precisely. Converting a company’s brand into tangible financial components is challenging, given many factors influence performance beyond the brand. Despite these challenges, a company’s brand remains an important part of overall business value,. Therefore, brand analysis is essential in business valuation.
This article was written by Darin Bifani.
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