David Haigh, CEO, Brand Finance plc
In 2007 the International Organization for Standardization ('ISO'), set up a task force to draft an International Standard on monetary brand valuation. After 3 years the ISO 10668 – Monetary Brand Valuation – will be released in Autumn 2010. This sets out the principles which should be adopted when valuing any brand.
The new ISO 10668 applies to brand valuations commissioned for all purposes, including:
• Accounting and financial reporting
• Insolvency and liquidation
• Tax planning and compliance
• Litigation support and dispute resolution
• Corporate finance and fundraising
• Licensing and joint venture negotiation
• Internal management information and reporting
• Strategic planning and brand management
The last of these applications include:
• Brand and marketing budget determination
• Brand portfolio review
• Brand architecture analysis
• Brand extension planning
Under ISO 10668 the brand valuer must declare the purpose of the valuation as this affects the premise or basis of value, the valuation assumptions used and the ultimate valuation opinion, all of which need to be transparent to a user of the final brand valuation report.
ISO 10668 is a 'meta standard' which succinctly specifies the principles to be followed and the types of work to be conducted in any brand valuation. It is a summary of existing best practice and intentionally avoids detailed methodological work steps and requirements. As such ISO 10668 applies to all proprietary and non-proprietary brand valuation approaches and methodologies that have been developed over the years, so long as they follow the fundamental principles specified in the meta standard. ISO 10668 specifies that when conducting a brand valuation the brand valuer must conduct 3 types of analysis before passing an opinion on the brand’s value.
These are Legal, Behavioural and Financial analysis. All 3 types of analysis are required to arrive at a thorough brand valuation opinion. This requirement applies to valuations of existing brands, new brands and brand extensions.
The first requirement is to define what is meant by 'brand' and which intangible assets should be included in the brand valuation opinion. ISO 10668 begins by defining Trademarks in conventional terms but it also refers to other Intangible Assets (‘IA’) including Intellectual Property Rights (‘IPR’) which are often included in broader definitions of ‘brand’.
International Financial Reporting Standard 3 ('IFRS3'), specifies how all acquired assets should be defined, valued and accounted for post-acquisition. It refers to 5 specific IA types which can be separated from residual Goodwill arising on acquisition.
The second requirement when valuing brands under ISO 10668 is a thorough behavioural analysis. The brand valuer must understand and form an opinion on likely stakeholder behaviour in each of the geographical, product and customer segments in which the subject brand operates.
The third requirement when valuing brands under ISO 10668 is a thorough financial analysis.
ISO 10668 specifies three alternative brand valuation approaches - the Market, Cost and Income Approaches. The purpose of the brand valuation, the premise or basis of value and the characteristics of the subject brand dictate which primary approach should be used to calculate its value.
Fig1. Brand Valuation approaches include Market approach, Cost approach and Income approach.
ISO 10668 was developed to provide a consistent framework for the valuation of local, national and international brands both large and small. The primary concern was to create an approach to brand valuation which was transparent, reconcilable and repeatable. In the wake of the standard’s launch it is expected that many companies will either value their brands for the first time or revalue them compliant with the standard.
Common commercial applications of brand valuation are brand portfolio and brand architecture reviews.
Brand Portfolio reviews consider whether the right number of brands and sub-brands are in the portfolio. Brand Architecture reviews considers whether individual brands are too fragmented and extended.
In both these cases, brand valuation analysis can help to evaluate the most effective value adding strategy. Brand valuation can help companies rationalise and rebuild their brand portfolios and trim their brand architecture to best address current market conditions.
Having determined an ideal brand portfolio and architecture at a point in time it is recommended to create a long term brand dashboard to monitor changes in brand equity and value so that swift corrective action can be taken if necessary.