Learn Strategic Brand Management
Brand Equity In Question
Strategic Implications Of Branding
Brand And Business Building
From Private Labels To Store Brands
Brand Diversity: The Types Of Brands
The New Rules Of Brand Management
Brand Identity And Positioning
Launching The Brand
The Challenge Of Growth In Mature Markets
Sustaining A Brand Long Term
Adapting To The Market: Identity And Change
Growth Through Brand Extensions
Handling Name Changes And Brand Transfers
Brand Turnaround And Rejuvenation
Managing Global Brands
Financial Valuation And Accounting For Brands
How do we evaluate the brand in practice using the discounted cashflow method? During a company acquisition, as soon as the target company has been taken over by its buyer, it becomes necessary to record its assets at their true value in the consolidated accounts of the buyer company or group. These assets include tangible and intangible assets; the brand falls into the latter category.
Given that the purchase price for the company is generally well above its nett accounting value, the difference (or gap) is known as the first consolidation difference, or goodwill in the wider sense of the term. It must be allocated to its various components, the company assets, evaluated at their ‘fair value’. The non-allocated residual balance will be referred to as goodwill in the strict sense. How then do we determine the value of each asset and, in particular, the value of a brand? This takes the form of a nine-stage procedure:
Thus, for a hygiene and beauty brand, the relevant unit would operate at product level for each distribution channel. Each product has its own individual profitability structure; and furthermore, the relative weight of the brand in the consumer’s decision-making process varies from product to product. Lastly, sales and growth potential also vary from product to product and from channel to channel.
This second stage aims to define the overall share imputable to intangible assets in the financial results forecasted for each of these units, and is known as the EVA (economic value added). This is obtained by taking the product or business’s trading profit and subtracting company tax (which gives nett EBIT), then allowing for permanent invested capital and working capital requirement (which gives the EVA). Invested capital is entered at a ‘normal’ rate (t), the average cost of the capital. This produces the following sequence of residual balances:
EBIT – Taxes = t (Tangible Assets + WCR) + t’ (Intangible Assets)
Nett EBIT – t (Tangible Assets +WCR) = EVA = t’ (Intangible Assets)
Remember that these calculations are based on a business plan: they are forecasts for future profits under a specific growth hypothesis.
A typical study consists first of identifying all the product choice criteria, then measuring the influence each one has in the customer’s decision, and lastly evaluating the brand’s share in the perception associated with each criterion. For example, we know that the brand has a strong influence on the perception of taste: in blind testings, consumers preferred Pepsi to Coca-Cola, but as soon as the brand is identified, they claim to have preferred the glass of Coca-Cola. Conversely, recognition of the brand has no influence on the perception of its presence in stores. By adding together the respective influence of each of these criteria and balancing these against the role played by the brand in evaluating each of them, we obtain an overall percentage which measures the brand’s total influence in the purchase. A typical service station brand will score a 30 per cent rating, whereas a soft drink brand will be of the order of 70 per cent.
This strategic analysis produces a risk evaluation, and thus a discounting rate for future use.
Assessing brand strength: strategic diagnosis
For this reason, it is common to crosscheck results obtained from the discounted sum of revenues imputable to the brand with an evaluation based on the royalties method. To do this, we calculate which royalty rate would, when applied to forecasted turnover, give the same overall current royalty value after discounting. It is reassuring if this rate matches standard figures for the sector.
For example, in the haircare products sector, l’Oréal would pay Jacques Dessange 3 per cent of its turnover for products sold under its licence name. If the gap between the results produced by these two approaches is too wide, a complete rethink is necessary in order to identify the sources of the discrepancy and, if appropriate, to correct them. For example, in an evaluation, the value of non-directly-calculated intangibles works out at a royalty rate of nearly 30 per cent. This is impossible. After analysis, it is decided to impute one-third of the value to the brand and two-thirds to the market share (an asset that can be recorded on the balance sheet in some countries).
An alternative version of the above procedure exists. It consists of taking (during Stage 4) the discounted sum of the combined value of all intangible assets; that is to say, the EVA taken as a whole – after having used the strategic audit matrix to establish the discount rate to be used, of course. This overall intangible asset value is thus distributed between each of them afterwards. As we can see, this variation assumes that the basis for distribution remains more or less the same regardless of which cash-generating units and products are involved.
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