Valuing Brands

Now with most of the heat from the IPLgate scandal dying down into small embers that may flare once more, some of the sound bytes that we , as viewers, heard on the news channels and came across in the print media was about the damage caused to the IPL brand. The IPL brand could have been damaged irreparably and the IPL brand has now become associated with sleaze. No self-respecting organization or individual would wish to be associated with a sleazy brand.

A brief history of the IPL and about Lalit Modi. However much Lalit Modi may parade his credentials as the IPL brand maker, a little peek at history will remind us that it was not the IPL that brought about a revolution in T20 cricket in India but it was the now defunct ICL (Indian Cricket League) that first introduced Indian viewers to the vagaries and pleasures of T20 tamasha cricket , though of course, it failed because the BCCI flexed its muscle and had all associated Indian and international players banned by the ICC since the tournament was not conducted under the auspices of the ICC. But the success of the ICL, in terms of television viewership, was a kick in the ass to the BCCI bigwigs and hence the unholy rush to have Lalit Modi launch the IPL and further hence have a hugely free hand in its running without any real due diligence either on the part of the BCCI or the IPL governing council. Interestingly, with the ICL shutting down shop, the ban on the ICL players was revoked and thus this edition of the IPL had the likes of Shane Bond and Ambati Rayudu plying their wares once more to a global audience.

The word brand began simply as a way to tell one person’s cattle from another by means of a hot iron stamp. The word evolved to become synonymous with a trademark, where a brand could be thought of is a name, sign, symbol, slogan or anything that is used to identify and distinguish a specific product, service, or business. A legally protected brand name is called a Trademark. The word brand has continued to evolve to encompass identity – in effect the personality of a product, company or service.

Customers are willing to pay a premium for a branded product or service over other competing products or services and thus there is a need to put a figure to what the monetary value of a brand is. Why is this important? This is important especially in the case of mergers and acquisitions where there is column in the balance sheet that is labeled Goodwill and that indicates the accounting value of the brand or the brand name.

But valuing brands requires quite different methodologies.

Some of these are listed below:

1> Historical Cost: This simply takes into account the costs associated with bringing the brand to its present state.

2> Replacement Cost: This simply looks at how much it would cost to create a new but similar brand anew.

3> Market Value: This assumes that the brand owner is willing to sell and there are buyers for the brand. The value of the brand is the market value.

4> Premium Price: This looks at the premium price commanded by a leading brand such as Kelloggs over a generic or unbranded equivalent such as other unbranded cereals in the case of Kelloggs.

5> Royalty Premium: This values the brand at the NPV of the royalty payments that the firm would have to make if it were to license the brand if it did not own the brand.

Quote of the day:
It is easier to forgive an enemy than to forgive a friend. – William Blake

6> The Economic Use Method: This is the method I favor.

The economic use method can be categorized into 2 types:

a> The economic use/historical earnings approach.

b> The economic use/future earnings approach.

a> The economic use/historical earnings approach.

Start with revenue attributable to the brand. Deduct from the revenue the operating costs associated with the brand to get operating profit.
Estimate capital employed by the brand, both fixed assets and working capital. Multiply this by appropriate capital charge (usually WACC), to obtain the charge for capital employed by the brand.
Subtract the charge for capital employed by the brand from the operating profit to get earnings after capital charge or economic value added (EVA).
Not all earnings are attributable to strength of the brand itself. Multiply EVA by proportion of the earnings that have to do with strength of the brand. This will give you brand earnings.
Multiply brand earnings by tax rate to give you tax payable on brand earnings. Subtract tax payable from brand earnings to get brand earnings after tax.
Finally , multiply brand earnings after tax by a factor which is usually price/sales ratio similar to P/E and P/BV.

b> The economic use/future earnings approach.

The economic use/future earnings approach follows the DCF methodology by projecting brand earnings into the future , for a minimum period of 5 years.

The procedure is as follows:

Follow the same procedure as in a> but calculate brand earnings after tax for not just year 0, but years 1,2,3,4, and 5..

Discount brand earnings after tax for years 0 – 5 to the present year.

Estimate terminal value or perpetuity of the brand.

Estimate the brand value as the discounted brand earnings after tax for years 0 –5 plus the terminal value.

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