Improving control on shareholder value

A wave of mergers and takeovers of companies with strong brands fuelled interest in brand valuation at the end of the century. In the following years public attention grew for the ever widening gap between values enterprises state in their corporate balance sheet and investors assesment of those values. According to the "Intellectual Capital movement" this growing market-to-book value ratio seems to indicate value creation by customer capital (including brands), innovations and human resources. All of this has fuelled the demand from shareholders to be able to judge for themselves the real value of the company's intangible assets. Nowadays most European standard setters follow the International Accounting Standards (IAS) 36 and 38 for guidance and rules on capitalisation and depreciation of intangible assets.


Identification of brands as 'cash generating units'

Unique intangible assets such as brands are generally seen to generate cash independently. Usually they are monitored separately, aswell. Therefore a brand (-operation) can be identified as the smallest group of assets with an independent income stream and by consequence with a separable value. According to accounting standards brands can be capitalised on the balance sheet and reviewed on a regular basis.

Others, who view the main goal of marketing & communication to be 'brand building' have only a strong desire for this creation to be formally recognised by a valuation for managerial purposes.

Brand valuation is likely to be accepted for the balance sheet and non-balance sheet uses. It will be more and more widely used as a managerial accounting technique.




Our special attention is focused on the wide range of possible applications of brand valuation. Awareness of brand value serves many purposes, including:


Brand valuation as a management tool

Awareness of brand value creates a management tool which can be used for effective brand (portfolio) management. It allows for assessment of strategies (e.g. through the Brand Capital Gains or Loss analysis) as well as marketing budget decisions (through profit planning by the Brands' Free Cash Flow analysis) and structuring of the financial basis for commercial strategy in general.

Portfolio management need not only apply to the company's own brands, but also to those which are operated and developed in collaboration with third parties.

Brand valuation as a Management tool not only creates a true 'stewardship' over the most important shareholders property. It also ensures of an acceptable environment for financial engineering.


Brand valuation for financial engineering


The purpose of financial engineering is to obtain additional capital on the basis of brand valuation (borrowed or otherwise) and/or to support tax driven policies (like international transfer pricing).

When the value of successful brands is made visible, there may be a general improvement in credit terms.

Financial constructions based on sale and lease-back, franchising or licensing agreements can also be used.

Several banks presented a special scheme to accommodate financial engineering of a sale and licence-back construction (please see below).




Brand valuation in mergers and takeovers

It is a well-known fact that brand building takes time and a great deal of money. The chance of success is between 10 and 30%.

If takeover candidates can be found, then acquiring established brands can offer an attractive alternative. Brand valuation can be used to determine the takeover price and to capitalise the acquired brand rights, if the buyer decides not to write off all the goodwill at once.


The research instruments for brand valuation can also be used to screen potential takeover candidates. Brand Competence not only has extensive experience in this field but has also developed special valuation methods for this purpose, such as the Brand Performance Score (BPS-) index and Brands' Free Cash Flow (BFCF-) index.



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