"If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trademarks, and I would fare better than you"

A brand is a name or a symbol - and its associated tangible and emotional attributes - that is intended to identify the goods or services of one seller in order to differentiate them from those of competitors. At the heart of a brand are trademark rights.

A brand designates a product or service as being different from competitors' products and services by signalling certain key values specific to a particular brand. It is the associations which consumers make with the brand that establish an emotional and a rational 'pact' between the supplier and the consumer. This pact is an ongoing relationship between the supplier and consumer, and because of this, brands provide a security of demand that the supplier would not enjoy if they did not own the brand. This security of demand means a security of future brand earnings, and this is what lies at the heart of brand valuation.

Ten years ago Interbrand conducted the first ever brand valuation for Rank Hovis McDougal. This exercise succeeded in putting the worth of the company's brands as a figure on the balance sheet. RHM's management wanted this information to fight a hostile takeover bid. With the brand value information, the RHM board was able to go back to investors and argue that the bid was too low, and eventually repel it.

It was the wave of brand acquisitions in the late 1980's that exposed the hidden value in highly branded companies and brought brand valuation to the fore. Some of these acquisitions included Nestlé buying Rowntree, United Biscuits buying and later selling Keebler, Grand Metropolitan buying Pillsbury and Danone buying Nabisco's European businesses. All these acquisitions were at high multiple price tags.

The amount being paid for the acquisition of a strongly branded company was increasingly higher than the value of the company's net tangible assets. This resulted in huge levels of 'goodwill' arising on acquisition. This 'goodwill' actually disguised a mix of intangible assets - brands, copyrights, patents, customer loyalty, distribution contracts, staff knowledge, etc.

An Interbrand study of acquisitions in the 1980s showed that, whereas in 1981 net tangible assets represented 82% (on average) of the amount bid for companies, by 1988 this had fallen to just 56%. It became clear that companies were being acquired less for their tangible assets and more for their intangible assets.

Although public perceptions of brand valuation are often focused on balance sheet valuations, the reality is that the majority of valuations are now actually carried out to assist with brand management and strategy. Companies are increasingly recognising the importance of brand guardianship and management as key to the successful running of any business.

The values associated with the product or service are communicated through the brand to the consumer. Consumers no longer want just a service or product but a relationship based on trust and familiarity. In return businesses will enjoy an earnings stream secured by loyalty of customers who have 'bought into' the brand.

 Applications of Brand Valuation

• Brand management and development
• Enhancing management communications
• Benchmarking of competitors
• Monitoring value year on year
• Creating a brand-centric culture
• Internal licensing, brand control and tax planning
• Mergers & Acquisitions
• Joint-venture negotiations
• Expert Witness - evaluating the economic damage of trade mark infringement
• Financing and insolvency- securing funds through identification of value of intangible assets.
• Balance sheet

Today, a widely accepted method of valuing a company or business is to discount the profit or cash flows it produces to a net present value. A similar approach can be used for brands. The profit streams produced by the brand are discounted to their net present value using a discount rate which reflects the riskiness of those income streams being realised. i.e which reflects the strength of the brand - the drivers of those profit streams.

Interbrand, the original pioneers of Brand Valuation, employ an economic use method which is the most widely accepted and has made Interbrand a worldwide authority in this field. It is based on the premise that brands, when well managed, affect the way that consumers behave in the market and the brand owner derives an economic benefit as a result.

Interbrand bases its valuation method on this concept of economic use and the fundamental question: how much more valuable is the business because it owns certain brands? It is thus a marketing measure that reflects the security and growth prospects of the brand and a financial measure that reflects the earnings potential of the brand.

Given this concept of economic worth, the value of a brand reflects not only what earnings it is capable of generating in the future, but also the likelihood of those earnings actually being realised. Broadly speaking Interbrand's brand valuation methodology comprises four elements:

1. Financial Analysis - to identify business earnings and 'Earnings from Intangibles' for each of the distinct segments being assessed
2. Market Analysis - to measure the role that a brand plays in driving demand for services in the markets in which it operates and hence to determine what proportion of Earnings from Intangibles are attributable to the brand (this is measured by an indicator referred to as the 'Role of Branding Index')
3. Brand Analysis - to assess competitive strengths and weaknesses of the brand and hence the security of future earnings expected from that brand (this is measured by an indicator referred to as the 'Brand Strength Score')
4. Legal Analysis - to establish that the brand is a true piece of 'property'

The most comprehensive text book on this subject is "Brand Valuation" edited by Raymond Perrier, Global Director of Brand Valuation at Interbrand.

It has been published in its third edition in 1997 by Premier Books, London. In addition, papers by Interbrand on the subject of brand valuation have been published in, among others, The Times, the Harvard Business Review, the Journal of Brand Management, Financial World and Interbrand speakers have in the last 10 years addressed over 100 conferences around the world on this subject.

Interbrand is currently compiling a league table of the value of the world's top fifty brands. This is due to be published in Forbes in the near future.

Brand Valuation, the book, can be obtained from book shops or direct from Interbrand.