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Financial Valuation And Accounting For Brands /The Evaluation Of Complex Cases

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The evaluation of complex cases

The above method works well for most brands, and is the standard approach. However, there are cases where, in order to evaluate certain brands – or brands in unusual market situations – we have to use one of the other methods examined above.

The case of loss-making companies

The above procedure is based on the theory that the brand is a conditional asset, and hence its value is obtained after the deduction of an allowance for the capital invested in production. This poses the problem of how to value brands owned by loss-making companies.

According to the above approach – which assumes a profitable balance – if there are no profits then the brand has no economic value in its current sphere of activity. It acquires value only if a new business plan, with very different cost structures, can demonstrate not only that the company can generate a profit, but also that there will be excess profits even after an allowance has been made for the tangible and intangible assets required for the production and distribution of the product or service.

Financial valuation thus dispels any mirages surrounding the brand: regardless of its reputation and image, a brand acquires value only if it is backed by a profit-making business plan. The term ‘mirage’ is an apposite one, as many buyers allow themselves to be seduced by brand awareness and image statistics. The economic approach reminds us that reputation and image are worth nothing unless they produce profit – with the help of other assets, which have to be factored in.

The case of abandoned and subsequently resold brands

Companies regularly kill off brands; in order for mega-brands to be created, business operations have to be contracted to just a handful of brands, and many must thus be disposed of. For example, Nestlé abandoned Chambourcy, and PSA abandoned Talbot. Nevertheless, brands can be sold on after several years of inactivity.

How can we use the multi-stage approach shown above if there has been no economic activity, and therefore no profit or loss figures? How, for example, can we estimate the value of a brand which has lain dormant for years, such as Talbot, Simca, Studebaker or Plymouth? According to the successive residuals approach, we should assess it as part of the new business plan incorporating this revitalised brand; or in any event, this is what the buyer should do before buying.

Another evaluation method consists of measuring the additional price and margin that the use of the hitherto defunct brand would enable its new user to command. We have to consider this in terms of the differential margin: although the brand might make it possible to charge a higher public price at the retail level, the retailer might well keep the majority of this increase and hand over only a modest proportion to the endpurchaser. In fact, this is often what actually happens: when the brand is weak, and returns to the marketplace after a long absence, retailers take advantage of the fact to increase the size of their cut.

It is in the interests of the seller to use a different valuation method. A good candidate is the replacement cost method (the amount that has to be spent now to rebuild the brand and its residual reputation, along with all of its copyright registrations worldwide, for example). As a last resort, there is always sale by auction.

How can weak brands be evaluated?

Some brands remain brands only in the legal sense: they have become mere names, and no longer influence buyers. How are these to be evaluated? This is a common scenario. Given that money was paid for these brands, the replacement cost method is advisable. For example, how much would need to be spent today to:

create a brand in this sector: name research, name tests and so on;trademark it in all relevant countries;devise a graphic theme for a new logo and so on?

How can young brands be evaluated?

This case is similar to the previous one. Once a young brand has proven that it can be profitable (for example, in the fashion market), the commodity being sold is in fact the time and money saved in establishing the legal and image foundations of the brand (its name and visual identity). Going beyond this means indulging in the same sort of risks taken by all investors in the dot.com brands, often to their cost.

Unlike our fashion example, these brands had provided no proof that they could one day make money. Without a business, and in any case without profits, they could not be evaluated in any reliable way. This was the cause of the internet boom: five-year business plans produced estimated revenues which, when multiplied by a factor of between three and seven, resulted in exorbitant valuations.

How can parent brands be evaluated?

Today, brand theory dictates a two-level architecture with a parent brand and daughter brands. For example, Garnier is a parent brand, while Fructis, Ambre Solaire, Feria and Graphic are daughter brands. So how can we calculate the value of parent brands such as Garnier and l’Oréal Paris?

Remember that the first essential stage in the process is segmentation into strategic units: cash reporting units. It is this requirement that the analysis be conducted at the level of reporting units and cash generating units that provides an explanation of how to evaluate parent brands that contain several daughter brands. Typical examples are Chanel and Dior. For example, there is no such thing as a Chanel perfume; rather, there are products with brands such as Chanel No 5, and Chanel No 18.

These are daughter brands. The same is true with Dior Parfum: the reason it has created a Fahrenheit unit, producing profit and loss accounts, is that value is being created at this point. By adding up our evaluations of individual daughter brands, we arrive at an overall cumulative value for them. The value of Dior itself, separated from its daughter brands, is thus a residual one.

 

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