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Why Variation Supports the Need for Brand Valuation

 

This message is in response to a piece by Mark Ritson published in Marketing Week and Branding Strategy Insider on April 22nd, based on a whitepaper produced by Markables.

“The suggestion that public brand valuations studies are ‘crap’ and worthless, simply because value opinions differ, is ill-informed nonsense.  No-one is surprised that valuation opinions for other assets vary widely, so why should brand valuers be expected to come to identical conclusions?

Compare this with share prices. Looking at Bloomberg today I find that 67 equity analysts follow Apple.  The current Apple share price is $130.  The lowest target price among analysts is $65 and the highest is $185.  The 12 month consensus target price is $143.  So there is a 300% high: low variance in valuation opinions. 66% say buy, 30% say hold and 4% say sell.

Brand Finance, Interbrand and Millward Brown all agree that Apple is the most valuable brand in the world.  In 2014 Brand Finance valued the Apple brand at $104 billion.  Interbrand said $119 billion.  Millward Brown said $148 billion. That is a variance of only 42%, which is hardly surprising in my view.  For other brands the variance may be much greater, but that is no surprise either.

There are many reasons for the variance: assumptions about long term market growth, specific brand growth, the proportion of revenue attributable to the brand, the useful economic life of the brand and the implied cost of capital.  We inevitably have different opinions on many valuation assumptions, which results in quite different valuation opinions.

There has been a global brand valuation standard (ISO 10668) for 5 years, which lists several acceptable valuation approaches and methods.  The Income approach is widely recognised as the best approach to brand valuation and all three major firms use it in their league tables.

We differ in the specific methods used for estimating what income is attributable to the brand.  Interbrand and Millward Brown use the Income Split method.  Brand Finance uses the Royalty Relief method. Otherwise we agree on how to value the brands. This is unlikely to be the main reason for the variance in our opinions.

Ironically the Royalty Relief method is the most frequently used by accountants to value brands for balance sheet purposes, post acquisition. But most accountants are very conservative and habitually under estimate the level of income attributable to brands they value.  They also tend to assume very short useful economic lives, low growth rates and high discount rates.  It is therefore no surprise that an analysis of brand values calculated for balance sheet purposes tends to undervalue brands. 

The assertion that purchase price allocations necessarily represent a fair value of brands is therefore deeply flawed. In addition, several brands that form part of Markables’ analysis have been transferred internally, making the figure highly unlikely to represent the true market value. Brand Finance will be conducting an analysis over the coming days and weeks to thoroughly unpick Markables’ research and set the record straight.

I prefer to rely on the opinions of people who genuinely understand brands and their true value. But in my view clients need full transparency and disclosure so that brand valuation opinions, and the reasons for them, can be understood and reconciled. We have always argued for this and ISO 10668 makes it compulsory.

Rather than being a symptom of an unhealthy brand valuation industry, differences in value opinions are a sign of its health and vitality. A public discussion on this subject is long overdue and I challenge Mark Ritson, Markables and any other interested parties to a debate in London when the newly convened ISO brand valuation committee reconvenes in London between the 9thand 12th June.” 

 David Haigh, CEO

 

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