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
Brand Finance is the world’s leading brand valuation consultancy. Bridging the gap between marketing and finance, Brand Finance evaluates the strength of brands and quantifies their financial value to help organisations of all kinds make strategic decisions.
Headquartered in London, Brand Finance has offices in over 20 countries, offering services on all continents. Every year, Brand Finance conducts more than 5,000 brand valuations, supported by original market research, and publishes over 100 reports which rank brands across all sectors and countries.
Brand Finance is a regulated accountancy firm, leading the standardisation of the brand valuation industry. Brand Finance was the first to be certified by independent auditors as compliant with both ISO 10668 and ISO 20671, and has received the official endorsement of the Marketing Accountability Standards Board (MASB) in the United States.
Brand is defined as a marketing-related intangible asset including, but not limited to, names, terms, signs, symbols, logos, and designs, intended to identify goods, services, or entities, creating distinctive images and associations in the minds of stakeholders, thereby generating economic benefits.
Brand strength is the efficacy of a brand’s performance on intangible measures relative to its competitors. Brand Finance evaluates brand strength in a process compliant with ISO 20671, looking at Marketing Investment, Stakeholder Equity, and the impact of those on Business Performance. The data used is derived from Brand Finance’s proprietary market research programme and from publicly available sources.
Each brand is assigned a Brand Strength Index (BSI) score out of 100, which feeds into the brand value calculation. Based on the score, each brand is assigned a corresponding Brand Rating up to AAA+ in a format similar to a credit rating.
Brand Finance calculates the values of brands in its rankings using the Royalty Relief approach – a brand valuation method compliant with the industry standards set in ISO 10668. It involves estimating the likely future revenues that are attributable to a brand by calculating a royalty rate that would be charged for its use, to arrive at a ‘brand value’ understood as a net economic benefit that a brand owner would achieve by licensing the brand in the open market.
The steps in this process are as follows:
1 Calculate brand strength using a balanced scorecard of metrics assessing Marketing Investment, Stakeholder Equity, and Business Performance. Brand strength is expressed as a Brand Strength Index (BSI) score on a scale of 0 to 100.
2 Determine royalty range for each industry, reflecting the importance of brand to purchasing decisions. In luxury, the maximum percentage is high, while in extractive industry, where goods are often commoditised, it is lower. This is done by reviewing comparable licensing agreements sourced from Brand Finance’s extensive database.
3 Calculate royalty rate. The BSI score is applied to the royalty range to arrive at a royalty rate. For example, if the royalty range in a sector is 0-5% and a brand has a BSI score of 80 out of 100, then an appropriate royalty rate for the use of this brand in the given sector will be 4%.
4 Determine brand-specific revenues by estimating a proportion of parent company revenues attributable to a brand.
5 Determine forecast revenues using a function of historic revenues, equity analyst forecasts, and economic growth rates.
6 Apply the royalty rate to the forecast revenues to derive brand revenues.
7 Discount post-tax brand revenues to a net present value which equals the brand value.
Brand Finance has produced this study with an independent and unbiased analysis. The values derived and opinions presented in this study are based on publicly available information and certain assumptions that Brand Finance used where such data was deficient or unclear. Brand Finance accepts no responsibility and will not be liable in the event that the publicly available information relied upon is subsequently found to be inaccurate. The opinions and financial analysis expressed in the study are not to be construed as providing investment or business advice. Brand Finance does not intend the study to be relied upon for any reason and excludes all liability to any body, government, or organisation.
The data presented in this study form part of Brand Finance's proprietary database, are provided for the benefit of the media, and are not to be used in part or in full for any commercial or technical purpose without written permission from Brand Finance.