Why should companies value their brands? ROI, that’s why

Tom Farrand, Novagraaf

 

 

07-09-2015

Novagraaf UK’s Tom Farrand outlines the reasons that companies are increasingly asking trademark attorneys to help assess the worth of their intangibles.

This article first appeared in the September 2015 issue of ITMA Review.

We all know brands are important and valuable to a business, but why seek to put an actual value on them? In today’s budget-focused boardrooms, trademark attorneys need to show that the legal rights that protect those brands aren’t unnecessary costs, but instead add value to the business. More than that, as your management accountant will tell you, ‘What gets measured, gets managed.’

Brands enable owners to repeatedly charge a premium for what is often the same, or a similar, base product. This applies in all sectors, from computers to coffee, and from painkillers to polo shirts. A pack of Nurofen tablets, for example, will set consumers back 12p per tablet, as opposed to 2p per tablet if they buy a supermarket own-brand ibuprofen equivalent.

It is the brand that entices a customer to pay more and come back for more. The trusted name serves as a reassurance of quality and a shortcut to reading the clinical data or comparing ingredient lists with an own-brand equivalent. This is brand equity.

In the brand valuation process, we are asking: what is that brand equity worth to the business? Or, rather: what’s its current worth and can it be further leveraged? Is there more that can be done?

Defining the what
In measuring value, we first define what we are seeking to place a value on. In this context, a brand is a marketing-related asset that may include names, terms and logos intended to identify goods, and create distinctive images and associations in the minds of stakeholders, thereby creating economic benefits for the owner. Stakeholders can refer to consumers, shareholders, investors, media and so on.

How we measure that brand’s value depends on the purpose for the valuation. Purpose dictates the premise (or basis), and that, in turn, dictates the method – and different methods produce different results. For example, is the valuation driven by strategic planning, financial reporting, dispute resolution or due diligence? Each of these will result in a different valuation premise and methodology – for instance, the desire to capture market value, as opposed to investment value or liquidation value.

The ISO 10668 was developed in 2010 to set a ‘standard’ for brand valuation. It covers three categories: legal, behavioural and financial. The first requires there to be an analysis of the strength of legal protection, the second measures stakeholders’ attitudes, and the third, financial performance.

Financial performance can be calculated by taking a market-, cost- or income-based approach – such as royalty relief, which looks at how much you could ask a licensee to pay to use your brand. Each of these can result in a slightly (sometimes even wildly) different end calculation. This broadly explains the disparity in results we see in high-profile brand-value rankings, such as those produced by Interbrand or Brand Finance. Even within income-based methodology, there are various approaches, so the ‘standard’ has plenty of variety.

Legal protection through trademark (and other) registrations has touchpoints throughout valuation calculations, no matter which methodology you use; the stronger and better managed that the trademark portfolio is, the higher the value of the brand may be.

The question of why
Few of us are accountants, so this is not the place for long-winded explanations of brand valuation calculations. For trademark attorneys involved in valuing brands, the ‘why’ should come before the ‘how’.

Some the most common reasons for undertaking a valuation exercise include: portfolio disposal or acquisition, preparation for an initial public offering (IPO), transfer pricing, IP licensing and IP securitisation. Each of these will require a different valuation method, or combination of methods.

But brand valuation is important at any stage of a brand’s life cycle, not just when it comes to a restructuring or sale. Any company needs to see that it is getting a return on investments made, and investment in IP protection is no different to an investment in new plant or manufacturing capabilities. Its just more difficult to articulate or quantify.

Of course, investment in protection is only one aspect of outlay in a brand, which could also include, for example, marketing and PR activities to increase awareness. Although a brand valuation will not necessarily prove that the investment in protection is the factor increasing or decreasing brand value, it will always be a factor.

There are instances where a strong brand protection policy has been undermined by bad publicity, which has a negative effect on brand value. Equally, a strong brand can be undermined by an inadequate trademark protection strategy that prevents the brand owner from, for example, expanding to new countries or new product ranges because someone else owns  those rights.

There are also the cases when the value of a company acquisition rested almost entirely with the IP assets being acquired.

Trademark ratings
Intangible assets account for over half of the total global enterprise value of companies as shown in a study(1) analysing the enterprise value of 56,000 companies listed on more than 100 stock exchanges around the world.

As with many industries, the functional differences between products and services have been narrowed to the point of near invisibility. It is intangible assets, such as brands, that provide the basis for establishing meaningful differences between apparently similar offers.

Of course, a brand is more than just a trademark but, without trademark protection, a brand is potentially worthless. This is why ISO 10668 requires legal analysis to rate the strength and value of the trademark portfolio that sits behind the brand being valued.

There are numerous methods of analysing the strength of a trademark portfolio. For valuation purposes, it is important that the method used can be replicated and that an awareness of competitor behaviour is incorporated into the methodology.

Novagraaf provides trademark ratings for Brand Finance, one of the well-known producers of  League Tables, as well as an analysis of portfolio strength for its individual brand valuation reports. This is done through a combination of public data, trademark search tools, and a proprietary methodology and standard ‘scoring’ system that highlights strengths and weaknesses in protection – whether strategic, geographical or product wide. In addition, we make overall recommendations for improvements – generally, areas where companies can act quickly to shore up protection, as well as advice on how to ‘futureproof’ their portfolios.

Many of these ‘weaknesses’ are simply an indication that the company’s trademark portfolio has fallen out of step with the reality of its market activity – for example, areas where it has moved into new classes or countries, but overlooked the need to put registrations in place first (or indeed after). We have even seen instances when companies have changed their names after merging with another party, but failed to register trademarks to reflect that. Some require a more detailed follow-up audit to provide further gap analysis and advice on remedial actions.

Often, some simple changes to a company’s strategy can significantly improve the rating on the trademark portfolio which, in turn, will affect the overall brand value.

Trademarks – cost or investment?
Trademarks and associated forms of IP are the one constant in brand creation. A product’s name, the design and colour of its packaging, and the corporate logo are not just marketing tools – they are legal rights which can bring great benefits and growth when nurtured and used properly. Yet, they can often be overlooked in the rush to market, or simply considered a drain on resources – an outgoing cost to the business that seems to bring in little return.

That’s why it’s important for us as an industry to showcase the contribution made by trademark assets to brand strength. We all know that a strong, well-managed registration portfolio has a direct influence on brand value, and therefore business value. Valuation of that asset can also unlock its true worth, and show that the right trademark registration strategy is an investment, not just a cost.

(1) Source: 2014 BrandFinance® Global Intangible Finance Tracker (GIFT™)

Brand valuation – a potted history

  • 1988: First notable valuation
    Premier Foods, then RHM, turned to valuation as a defensive measure when subject to a hostile takeover bid. It valued Britain’s much-loved Hovis brand to show that the takeover offer undervalued the RHM business.
  • 2000: $1bn securitisation
    RHM was, this time, the subject of the first major IP-based securitisation. The company raised more than $1bn using its brands as security, leading to the issuance of a ‘brand bond’ the following year.
  • 2001: “100 Best Global Brands”
    First brand league table published by Business Week.
  • 2004: IFRS3
    Introduction of the International Financial Reporting standard.
  • 2010: ISO 10668
    International Standard for brand valuation introduced.
  • 2014: League Tables
    Today, brand valuation league tables are commonplace, and brand valuation has become accepted as an important part of valuing business.

Tom Farrand is Managing Director, Trademarks, UK at Novagraaf

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