Relevance of brand valuation

Ruchi Gunewardene, Managing Director and Ali Alihussain, Valuation Manager of Brand Finance Lanka, respond to MTI’s Hilmy Cader, who questioned the relevance of brand valuations in the context of valuing a business.

Business value consists of the sum total of tangible and intangible assets. Whilst it is common knowledge that tangible assets can be broken up into individual components such as land, building, machinery, etc., it is a less known fact that intangible assets too have different classifications. It is therefore worth articulating these for the purpose of clarity: 

• Knowledge intangibles: For example, patents, software, recipes/formulations, specific knowhow, including manufacturing and operating guides and manuals, product research including product trials data, information databases, etc.
• Business process intangibles: These include unique ways of organising the business including innovative business models, flexible manufacturing techniques and supply chain configurations.
• Market position intangibles: For example, retail listings and contracts, distribution rights, licenses such as landing slots, production or import quotas, third generation telecom licenses, government permits and authorisations and raw materials sourcing contracts.
• Brand and relationship intangibles: These include trade names, trademarks and trade symbols, domain names, design rights, trade dress, packaging, copyrights over associated colours, logotypes. 

As per the current Sri Lanka and International Accounting standards, in the event of a merger or acquisition, the acquiring company needs to recognise these intangibles and include them in the balance sheet. They have to be clearly and separately accounted for, and can no longer be included under the broad classification of goodwill. Only after valuing their intangibles, can they classify any residual value as goodwill. 

Identifying where value resides in a business is important, to identify the best opportunities for investment and ensuring resources are allocated to those activities which will have the most impact on business value creation. 

Use of brand valuation

Brand Finance Lanka, has carried out many brand valuations over the last 13 years for various purposes. It would be useful to set out a few of them, to illustrate the varied uses of this tool.

A brand valuation for a retail brand was carried out, as the acquirer was required to disclose the value of the acquired company’s intangible assets in the financial statement based on International Financial Reporting Standards. In this context, the valuation of the acquired brand was recognised at fair value in the company’s Balance Sheet. Plus, the management recognised if the transaction was a good deal and how much more it would be possible to leverage the brand to increase its bottom line. 

Prior to a sale, a brand valuation of a listed financial institution was carried out, to help support and justify the proposed total business valuation to the acquirer in the negotiations. 

In order to identify which of two hotel brands that were owned by a company would perform better in the future market space, a scenario analysis involving brand valuations were carried out. 

A valuation for a retail FMCG brand was done for the purpose of transferring that brand asset from a listed entity to another company within that conglomerate. 

A similar valuation for a beverage company that intends to transfer its brand to an independent intellectual property company, for the sake of greater financial efficiency and asset management is currently underway.

A brand valuation for investor relations purposes during the initial public offering (IPO) of a telecommunications company was carried out to inform the value of the brand and the potential payoff it can generate to potential investors.

Recognition of intangibles is the future

The introduction to ISO 10668 which is the standard methodology for brand valuation states that: “Intangible assets are recognised as highly valued properties. Arguably the most valuable but least understood intangible assets are brands.” The purpose of the Standard is to provide a consistent and reliable approach to brand valuation. To this end it specifies requirements and procedures regarding valuation methodologies, sources of information, and reporting requirements.

The manner in which intangible assets are valued may be difficult to understand for some, in a world where assets are commonly considered as tangible. 

The reality however, is that the business world we operate in, is now driven increasingly by intangible assets rather than tangible assets, and therefore an understanding and enumerating these are vital for better and more effective management. This is a practice that is being increasingly adopted by many companies who are focused on the knowledge economy and recognise that resources such as trade secrets and brand expertise are as critical as other economic resources.

Brand Finance which is headquartered in UK, was founded in 1996, and is the world’s leading independent branded business valuation and strategy consultancy firm, helping companies to manage their brands for improved business results. Brand Finance Lanka was formed in 2004.

(Ali Alihussain, Valuation Manager of Brand Finance Lanka can be contacted on A. [email protected].)