Tuesday, 12 July 2011

Brand Valuation

The Copyright of this article rests with the writer Mr. Vinod Khurana, President IFAIA

In the recent past valuation of intangible assets related to intellectual property particularly a brand has gained a considerable importance. Valuation of individual intangible assets is a recent concept in India, though the generic intangible assets better known, as Goodwill has been valued for a very long time. The Goodwill was valued when ever a business as a whole was transferred from one entity to another or when new partners were brought in or old partners left the business to give them there dues as part of their contribution to the business. The recent concept of valuation of Intangible assets related to Intellectual property like Patents, Copy rights, Design, Trademarks, Brands etc, is getting greater importance as these intellectual properties of the business is now often sold and purchased in the market by itself, like any other tangible asset.
Coming to brand valuation, we would say that creating a power brand involves blending of resources in a unique way. The resources spent on brand building are not consumed and have a lagging effect, which ultimately turns out in formidable asset formation, over a period of time. Building of brands takes years; most of the famous brands are even 100 years old. What we need to understand is that the value of the brands needs to be maintained continuously and is not some thing that is consistent or permanent, they do change with the changing environments. What matters in business is to maximize the economic wealth, therefore if the establishment cannot maintain brand or the importance of the brand has higher commercial value in the hands of other organization, one may just like to exchange hands or shake hands as it benefits both the parties and makes economic sense .In order to optimize the gains it becomes necessary to know the intrinsic value of brand from time to time .I illustrate this with a simple example, say a reputed Indian brand motorcycle is selling for Rs.40000/ which has a basic cost of Rs.30000 + 30% taxes i.e.Rs.9000 + Rs.1000 profit, is facing a competition from import and imported compatible motorcycle in all respect is also selling for Rs.40000/, which has a basic cost of Rs.25000 + tariff and other taxes 60% i.e.Rs.15000 and with nil profit. Presently Indian manufacturer is not facing any serious threat due to its brand equity, though the market price is same. As we know that by the year 2004 the scenario is going to change considerably and the taxes on the import would be compatible with the taxes on the indigenous related product. So say in this case the revised cost of sale of imported motorcycle will be Rs. 32500/ i.e. Basic cost as it is of Rs.25000/ and revised taxes 30% i.e.RS.7500/ against the indigenous motorcycle cost of sale of Rs.39000/. In these circumstances what does the indigenous manufacturer do? Will he be able to compete with the imported motorcycle? And if he is not able to compete then what happens to his brand? Which he has built over many years and which presently can be sold for substantial economic consideration. The Indian corporate with substantial brand value of there product may face such situations in time to come, there fore he needs to address himself and formulate a strategy and to do that the knowledge of brand value is of great importance.Many legal issues arise while doing commerce on Internet which needs to be understood e.g. how far the web contents is protected by copyright law, how effective are the copyright in the present scenario when they become accessible globally, how the privacy and security can be maintained, what Constitutes defamation on the Internet, as the electronic commerce has no geographical boundary. We must be clear as to the repercussion and possibility of defending a lawsuit, in any country where end user resides.

The Brand can be one of the four forms, they are:

  • Brands which are Associated with the product and no association with the manufacturers name. 

  • Brands where the Manufacturers name is attributed to a product. 

  • Brands where the company and product name is blended. 

  •  Brands that are personalized.  The modus operandi of the valuation would vary in each case. To valuate a brand & other intellectual properties the valuator requires careful analysis, keen judgment, through professional knowledge and a team of think tank who have expertise in finance, marketing, technical know-how, and in legal fields. There are forty odd variables, which in generic term are called Environments that affect the value. The environments broadly are internal & external environment and the major variables are internal strength, marketing scenario, technical know-how and its changing speed, growth prospective, competition scenario, government policy, impact of globalization etc. In present scenario impact of WTO treaty need critical evaluation to under stand its implication on the brand by the year 2004. This variable has given a new dimension to the valuation process and its importance needs to be urgently understood and addressed for formulation of business strategy .The impact of all these variables would vary from sector to sector and on type of brand and hence would need different weightage for evaluating .One of the valuation technique is 'Discounted Cash Flow Technique' .The focus of analysis of all these variables is to correctly predict the future cash flow exclusively attributable to the brand . This is comparatively a simple exercise if the future is continuity of the past but when there is divergence of one or more variables, then their impact in totality on the future cash flow with certainty becomes complicated and this deepens depending upon changes in number of variables and their individual and combined impact. Once we are able to formulate the expected future cash flow, we need to work out the discount rate. This is important as well as critical area of valuation. As said earlier not all the resulting cash flow can be attributed to the brand it self, large amount of it necessarily reflects the value of other assets employed in business, such as fixed assets, distribution system etc, hence we need to make appropriate adjustment for the discount rate to work out the brand valuation .The risk that is attached to the brand earning is given due weightage. Same analogy is also applied under different parameters to valuate other intellectual properties. In other words the valuation of these assets is the worth now of the benefits of the future ownership. 

  • Valuation has various intangible and tangible benefits

  • Tangible benefits are:

  • Merger & Acquisition: It is of critical importance for an acquirer, as well as for the vender to understand and evaluate their real worth for negotiating the correct price. 

  • Disposal: The current focus on brands has led many companies to recognize that they cannot support properly all their brands or certain brands could be worth more to a third party than to their current owner. Brand evaluation technique can be used to judge which brand to dispose of and their possible economic worth to a third party.

  • Fund Raising: Brand valuation are playing an increasing prominent role in the area of fund raising, particularly from the public as brand represent robust asset against which to seek funds is much easier  

  • Discount Rate: Robust strength also assists in arranging the large funds at lower cost.

  •  Intangible benefits are:

  •  Enhances Confidence: Brand credibility shows the faith & confidence of public at large in the product; Valuation if reflected in the books of accounts further enhances the public loyalty to the product and hence becomes a force multiplier. 

  •  Indicator of effective utilization: The investment in the brand building creates value in the reverse direction when compared to the capital expenditure. When you invest in capital expenditure you utilize the proportionate cost every year, which we write off in the form of depreciation or amortization, where as the expenditure in brand building is incurred to day and this expenditure is converted into valuable asset over a period of time. The expenditure is considered as revenue expense due to accounting & taxation provision which really is not so, hence valuation gives you the real affective worth, which you have created over the years through brand building. 

  •  Credibility to the real worth: If you valuate your brand only at the time of disposal it has a much lesser influence and will always leave a doubt of its real worth, in the mind of both the buyer as well as the seller where as if the brand is continuously valued has a different impact and gives much more creditability to the real worth. 

  •  Strategy development: Companies are applying brand evaluation techniques in order to under stand and manage their brands better. Brand evaluation involves a detailed examination of a brand from marketing point, a financial and legal prospective. It also examines the brand performance, prospective, market opportunity, and competition. It thus provides an excellent tool for strategy development.

  • If the organization does not know its value how can the organization monitor its growth and other parties correctly valuate it. In view of its advantages, it therefore, becomes imperative for any business organization to know the value of its intangible assets from time to time to formulate a business strategy.