Brand valuation
What is a brand valuation? | Brand Valuation
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What is a brand?
The power of a brand is manifested in its ability to influence the minds of consumers. An effective brand is easy to remember and encapsulates the company’s concept. International evaluators consider that “a brand is not only a product identification, but also a tool for legal protection,” which underlines the importance of its appraisal. According to the World Intellectual Property Organization (WIPO) and the Mexican Institute of Industrial Property, a brand is “a name, expression, symbol or design, or a combination of both, intended to identify the goods and services of a merchant or group of merchants, allowing competition between them.” Brands are an integral part of intangible assets, which are those that do not have a material form.
What is the purpose of brand appraisal?
Today, a brand is considered one of a company's most valuable assets, comparable to fixed assets such as machinery or property. However, current accounting regulations do not allow the recording of intangible assets generated by companies that exceed their cost, with the exception of research and development projects.
International Financial Reporting Standard 3 (IFRS 3) requires that, when acquiring a business, the purchase price be allocated to assets, including those not previously recorded, at their fair value at the time of acquisition. This standard defines an asset as “a resource controlled by an entity as a result of past events that are expected to produce future economic benefits,” such as sales of products or services.
Financial Reporting Standard C-8 defines intangible assets as “identifiable non-monetary assets that do not have a physical form and that can generate future economic benefits that are controlled by an entity.” Intangible assets, and in particular brands, are recognized as high-value assets, often being the most valuable, although less visible.
ISO 10668 states that “the monetary value of a trademark represents the economic benefit that the trademark produces over its expected useful economic life.”
Factors for valuing a brand:
- Probability of entry of competing brands: The ease with which new competitors can enter the market can affect the value of a brand.
- Brand badge: The ability of the mark to be easily recognizable and legally defensible.
- Brand protection: The strength of the intellectual property registry that protects the brand.
- Brand strength: Includes consumer loyalty and market positioning.
- Brand Renown: The notoriety and recognition of the brand at national and international level.
- Development or Incorporation Sector: The growth or maturity phase of the sector to which the brand belongs.
What are the characteristics of brand appraisal?
The importance of brands has intensified in recent years, leading to brand valuation becoming an area of great interest for professionals. The value of a brand is largely a reflection of consumer perception; therefore, its valuation must take into account market opinion.
How is a trademark valued?
Choosing the most appropriate valuation method is crucial. When sufficient information and data are available to estimate the fair market value of the brand, valuers should maximize the use of observable and relevant inputs. The objective is to estimate the fair value of asset sales between market participants, taking into account current conditions.
IFRS identifies three commonly used methods for valuing trademarks: the market method, the cost method and the income method. Judgement must be exercised in determining whether the fair value of the trademark can be estimated with a reasonable degree of certainty using these methods.
For example, the market approach may be applied if there is an observable market for the purchase and sale of comparable brands. If data is scarce, the other available approaches should be considered. In the income approach, it is essential to review the company's financial statements and use the most reliable valuation method. The choice of method depends on the particular situation in which the brand is being valued.
What methods are used in brand valuation?
COST APPROACH
This method is based on direct and indirect costs related to the creation and promotion of the brand, such as: Graphic designer fees Salaries of personnel involved in the development of the brand name and image Advertising and marketing expenses
MARKET FOCUS
To apply this method, it is necessary to know the value of similar brands. The appraiser conducts market research to obtain a fair value. The accuracy of this approach depends on the size of the sample of brands analysed.
INCOME FOCUS
This approach is based on future projections of the revenue stream generated by the brand. Its calculation should take into account cash flow and goodwill, as well as reviewing the accounts for the past five years and any relevant audits. This approach is particularly useful for established brands with a track record of revenue.
Why is it necessary to carry out a brand appraisal?
- Price optimization: Allows you to sell products at higher prices or increase sales volume.
- Definition of the corporate mission: Helps clarify the direction and objectives of the company.
- Accurate company valuation: Provides a clear view of the total value of the company.
- Basis for transactions: It is essential in the processes of buying or selling companies.
- Best negotiation: Facilitates negotiations with financial institutions.
- Guarantee for loans: It can be used as collateral to obtain financing.
- Best financial presentation: Increases the company's capital by reflecting the value of intangible assets in the financial statements.
- Tax benefits: It may offer advantages in terms of tax deductions.
Brand valuation is a critical aspect of modern business management, given that intangible assets represent a significant part of a company's assets and their correct evaluation becomes increasingly crucial.
ANEPSA GLOBAL
With Anepsa Global it is possible for this and other types of appraisals to be carried out, contact us by leaving your information or sending a message through our social networks, we are here to provide you with advice and guide you so that you know what type of appraisal is best for you.
