What is Brand Valuation?
A brand, regardless of the organization and its nature of the business, is associated with several different elements such as the consumer’s trust, the consumer’s relationship with the organization, and the identity that the company has built over the years. If one searches the internet, a brand could be defined in several different ways, some of which would include all of these said elements in it. But what exactly is a brand valuation, and how is it defined?
Brand valuation, in simple words, could be defined as the process used to determine or calculate the value of a particular brand, or the money that someone would be paying for the brand, or determining the financial value of the brand. Brand valuation gained popularity and importance in the 1980s, when food companies were on an acquisition spree, and which gave rise to the need for valuation and assessment of brands.
What are the Benefits of Brand Valuation?
The most obvious of all the benefits of brand valuation is that the business owners understand the market and financial value of the brand. However, there are some other benefits associated with brand valuation. Let us take a look at a few of them.
- Brand valuation simplifies and makes brand management more effective
- Brand valuation gains significance when an organization intends to evaluate its assets and brand.
- Brand existence in the company’s balance sheet shows the actual returns from the assets
- Brand valuation proves important for businesses in the service industry that don’t have a large number of assets, but a significant number of customers.
- Brand valuation prevents hostile bids and establishes the brand value of the company in the market.
Different Methods of Brand Valuation
Brands could be valued through different methods based on its earnings, premium profits, and through the relief from royalty method. Let us glance through each of these methods.
- Earnings: In this method, one deducts the brand product profitability that is accredited to tangible assets and other important factors, keeping the brand value aside. Nonetheless, in reality, or practically, it is difficult to credit profitability to the company’s tangible assets and other elements.
- The Relief from Royalty Method: This method is comprised of the calculation of the value of the brand by calculating the amount that the owner of the brand would save by not paying for using the brand, or by how much would a third party pay for using the brand.
Premium Profit: This method involves the assumption that a branded product would sell more than an unbranded one. It is the difference in price between the branded and the unbranded product. It is this difference that is called the premium. When you multiply the premium with the annual sales forecast of the product, it gives you a cumulative amount, which is referred to as the annual price premium, and the sum of which, in turn, is the known the value of the brand.
By
CA Anandkumar Gawade
Registered Valuer for Securities and Financial Assets.