When selling a company, business owners try to value different elements of their businesses in order to determine an appropriate sale price, including their assets, their cash flows and even their business relationships. In reviewing elements of their businesses that have value, one question that business owners often ask is, “What is my company’s brand worth?”
While 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, in fact 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 and 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 and 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.
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, but 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 in the mind of consumers or the market 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 in the mind of consumers or the market 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 than competing brands; 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 its association in the mind of consumers or the market with how the company operates or carries out its business, ranging from how it treats employees, to its work in the community to its values. A brand that strongly projects these values can have a major impact on consumer purchasing decisions if consumers 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 costs spent on developing a brand are generally relatively straightforward to quantify, two companies that spend the same amount on building a brand can have very different sales, levels of financial performance and market positions. For this reason, cost approaches to brand valuation often should be viewed as providing a very limited picture of a company’s brand value.
Market Approach. The second approach is the market approach, which 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, but this in practice can be difficult to do because every company brand is by definition unique.
A variant of this approach is to consider performance and financial differences between companies in the market and analyze the extent to which these differences are attributable to brand value. For example, if one company sells coffee for $3.00 a cup and another company sells coffee for $5.00 a cup, if all other things are equal it could be argued that the difference in the price of coffee is attributable to 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 because 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, which 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 its 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.
Brand valuation is perhaps more of an art that a science, and without a doubt it can be very difficult to value a brand precisely because of its intangible and unique nature. Further, converting the intangible elements of a brand into tangible financial components of a business’ value in sale negotiations is challenging because of the many factors that can contribute to differences in company performance other than its brand.
Despite the challenges involved in brand valuation, brands are an important part of a company’s value and trying to analyze a brand’s value is an important part of the analysis of the overall value of a business.
This article was written by Darin Bifani – ONEtoONE Partner in Chile.
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