League Table Brand valuation methodology. How we measure brand value (short explanation)

Transcription

1 League Table Brand valuation methodology How we measure brand value (short explanation)

2 Valuation approach ISO is the global standard for brand valuations In December 2010, Brand Finance became one of the very few companies in the world to be accredited with the ISO global standard for brand valuations. ISO is the international norm that sets minimum standard requirements for the procedures and methods used to determine the monetary value of brands. David Haigh, CEO Brand Finance, was the UK representative on the ISO working party and chaired drafting meetings over a 2 year period to shape ISO Brand valuation Basic requirements for methods of monetary brand valuation The certification program was developed in collaboration with the Austrian Standards plus Certification, which has attested that Brand Finance conducts its brand valuations in accordance with the new standard, which requires three key phases of work: IP audit and review (legal review) Behavioural analysis (market research review) Valuation (financial review) Brand Finance Overview

3 Valuation approach There are several different methods available for determining the fair value of intangible assets, each falling within one of the three fundamental approaches identified in current international valuations standards. These are: Market Approach Establishes value by analysis of recent sales of comparable assets The fact that intellectual property is frequently sold as part of a business combination reduces the availability of comparable data The unique nature of most intangibles means that even if sales prices for comparable IP are available, adjustment will be required for differences in the utility of the property as well as factors such as the relative market conditions at the time of the sale and the remaining economic life. Cost Approach Values an asset on the basis of its historic cost of creation, or the estimated cost to create a replacement asset with similar commercial utility Consideration is given to all costs associated with replacing or replicating the asset, less an allowance for any forms of obsolescence that has occurred The cost approach is only appropriate for valuing easily replicable assets Income Approach Values an asset as the present value of the future earnings that it is expected to generate In the case of intangible assets, a number of methods are available to attribute portion of an enterprise s earnings to each asset (detailed in the next slide) The Income approach is widely regarded to be the best approach and practice to valuing brands. The ways in which this can be done are outlined on the following page. Valuation Approach

4 Valuation approach There are several different methods available for determining the fair value of intangible assets, each falling within one of the three fundamental approaches identified in current international valuations standards. These are: Market Approach Comparable market transactions Cost Approach Cost to create Cost to recreate Income Approach Price premium Volume premium Income split Multi-period excess earnings Incremental cash flow Royalty Relief Within the Income approach, relief from royalty is considered to be the most robust and effective method. An overview of royalty relief is explored on the following page. Valuation Approach

5 Introduction to Royalty Relief methodology The Royalty Relief approach is based on the assumption that if a company did not own any trade marks it would need to license them from a third party trade mark owner instead. Ownership therefore relieves the company from paying a license fee (the royalty) for the use of the third party trade marks By determining the royalty fees the business would theoretically be required to pay, we are able to estimate the proportion of future cash flows that are attributable to the brand the present value of the post-tax royalties are held to represent the value of the brand today; Royalty relief is generally accepted as a robust method for valuing brands and patents because: It ties back to the commercial reality of brands - their ability to command a premium in an arm s length transaction; The methodology is specifically recommended by the IVSC for use in IFRS reporting; & This method relies on verifiable third party data (licensing agreements where appropriate) and therefore less judgment is involved than other methods. Brand Finance uses Royalty Relief to value brands in the Global 500 League Table because: It is the approach that is most recognised by technical authorities worldwide and favoured by accounting, tax and legal users because it calculates brand values by reference to comparable, third-party transactions. It can deliver a robust valuation even when only limited data is available Valuation Approach

6 Introduction to Royalty Relief methodology 5 steps to the Royalty Relief methodology The Brand 1. Determine forecast Revenue Determine future revenues for each brand over a five year explicit forecast period. This is done by referencing historic revenue trends, market growth estimates, competitive forces and analyst projections. 2. Establish Royalty Rate Range Review comparable licensing agreements. Analyse margins and value drivers across business units. Establish average royalty rate range for each sector. 3. Assess the Brand Strength Determine the strength of the brand using the BSI. Apply BSI to royalty rate range to determine royalty rate for the business units. 4. Determine the Discount Rate Determine discount rate to calculate the net present value ( NPV ) of future brand earnings (accounting for the time value of money and the associated risk). 5. Brand Valuation Calculation The NPV of post-tax royalties equals the brand value Valuation Approach

7 Visual representation of the three leading methodologies X X RR tax Discount Rate NPV = Brand Value Royalty Relief approach Revenue Forecast ROYALTY RELIEF: Determine sales forecast, multiply sales forecast by royalty rate, deduct tax. Net Present Value (NPV) of brand contribution = Brand Value (Favoured by Brand Finance plc) Deduct Charge for Capital Employed 3 X = % 2 4 NPV = 5 RoB 1 Discount Rate 5 Brand Value Earnings split method 1 Forecast Earnings Role of Branding Brand Contribution (%) EARNINGS SPLIT (Role of branding): Determine forecast earnings, deduct charge for capital employed to give intangible earnings (EVA), apply role of brand to determine brand contribution. NPV of brand contribution = Brand Value $ Corporate Earnings $ Intangible Earnings $ Allocated Intangible Earnings X % X B = Brand Value Earnings split method 2 Intangible Earnings ($M) Brand Contribution (%) Brand Multiple (x) EARNINGS SPLIT : Determine current year earnings, deduct charge for capital employed to give intangible earnings (EVA), determine brand contribution. Apply brand multiple = Brand Value Our approach 7

8 Methodology summary Royalty Relief method Earnings split method 1 Earnings split method 2 Definition of Brand Value Brand Value is the Net Present Value of the estimated future cash flows attributable to the brand The dollar value of a brand is calculated as Net Present Value or today s value of the earnings the brand is expected to generate in the future The financial value of a brand is defined as the sum of all earnings that a brand is expected to generate Valuation based on which key financial metric? Net Sales Intangible Earnings Intangible Earnings Forecast of future Economic Value Added Royalty Rate study based on third party arms length comparables, brand strength and margin analysis Based on drivers of demand analysis (Role of Brand Index) Based on % of committed consumers base Time scale (modeling) DCF of five year explicit forecast and perpetuity DCF of five year explicit forecast and perpetuity Not explicitly taken into account; Uses current Intangible Earnings How is risk accounted for? Discount rate calculated from first principles using Capital Asset Pricing Model (CAPM) producing Weighted Average Cost of Capital (WACC) that takes into account brand specific risk Discount rate determined by estimating brand risk using a Brand Strength Index (BSI) and applying the answer to an S curve of possible rates. Multiple (short term growth indicator) BV Calculation BV = (Si * RR*(1-tax))/(1+r)i Where S = Sales Forecasts; RR = Royalty Rate; r = Discount Rate; i = number of years BV = (EVAi * RBI)/(1+r)i Where EVA = Intangible Earnings; RBI = Role of brand Index; r = Discount Rate (S curve); i = number of years BV = EVA * (%) * M Where EVA = intangible Earnings; % = Brand Contribution); M = Brand Momentum Our approach 8

9 Pros & cons Royalty Relief Earnings Split Pros This is an accepted methodology for valuing brands, that is widely used and based in commercial reality. It is commonly used in legal cases and tax disputes; It ties back to the commercial reality of brands - their ability to command a premium in an arm s length transaction. The methodology specifically recommended by the IVSC for use in IFRS reporting; It relies on verifiable third party data (licensing agreements) and therefore less judgment is involved; It recognises that brands can have a value even where the underlying business is unprofitable. It can be performed on the basis of publicly available financial information. Cons At times it is difficult to source comparable license agreements for a particular sector. Unless the Royalty Range is analysed carefully, it could lead to a conservative or even an aggressive brand valuation. Also a generally accepted methodology for valuing brands With sufficient market research, it can provide insight into impact of drivers of demand on the value of different intangible assets in the business Highly judgmental, particularly when done without specific, detailed market research into drivers of demand Calculations based on profit can lead to volatile results which do not reflect the underlying value of the brand; businesses that are loss-making will have zero or negative brand value, which is inappropriate in many cases Approach to determining discount rate has been criticised as lacking transparency and not being applicable to all situations Generic approach for brand strength may lack cohesion with particular sectors Calculations of EVA are notoriously complex and hard to audit. E.g. Stern Stewart claim to make 167 adjustments between accounting profits and EVA (EVA s of many brands from time to time can be negative) Our approach 9