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Published by Enhelion, 2019-11-24 05:14:32

IP_Module 11

IP_Module 11



In its simplest form, valuation is the estimation of present value of the future economic
income that the IP is expected to generate. Ultimately a valuation is no more than a
prediction of the result of an assumed transaction. It is not mathematically exact. It relies
upon assumptions.

Texts on valuation of intangible assets often emphasise the distinction that should be made
between the concepts of cost, price and value. They are not synonymous or
interchangeable, but each may have a role in the process of valuing intangible assets. Cost
will usually identify information concerning the production process. Price reflects
information about a transaction at a particular time, between certain parties influenced by
the relevant marketplace.

The valuation methods described below all involve establishing assumptions for the purpose
of the appraisal and collection of information. The assumptions made for the purpose of
valuation are critical and, as noted above, those assumptions should be agreed between the
enterprise and the appraiser. To some extent the assumptions made will depend upon the
nature of information that cannot be acquired.

The appraiser will rely heavily upon the enterprise for information to perform the appraisal.
This material will identify some of the types of information that the appraiser may require in
order to value the IP of an enterprise.


There are three fundamental forms of valuation: cost, income and market. Although the
income approach is the predominant methodology applied by appraisers each of the other
methodologies plays a part in enabling an enterprise to identify 'out of the park' results and
inconsistencies that may be applicable to the enterprise, the technology or the IP. The
objective and purpose of the valuation will directly affect which method will have the
greatest relevance to the valuation.

All three approaches endeavour to achieve the same objective: to determine an indication
of the value of IP asset at a certain date. These methods are not new and have been
developed since tangible property was first considered in a commercial context. All three
methods can be used to assist in the valuation of IP. More than one method can be used to
cross check the application of the principles to allow for any idiosyncrasies arising from
assumptions made or data collected.

The AASB is undertaking a review of the existing Indian Accounting Standards for valuation
of intangibles with a view to achieving consistency with international practices. The timing
for these reviews is unclear. The resulting revised standards are likely to have a significant
impact on the preferred approach by Indian appraisers of IP and enterprise, particularly


those enterprises that will be subject to the Corporations Act requirements that require
companies to apply AASB standards.

The appropriate methodology will largely be determined by the stage of development of the
technology or product. If the technology is some time from reaching the market then the
cost-based approach will involve fewer variables. At that stage the purpose of the IP or
technology may not be clear. That uncertainty fades away as the technology is developed.
The market approach may then become more appropriate. If revenue is imminent then the
income approach becomes feasible.

The process for valuation will often involve some form of due diligence being undertaken
upon the technology and the IP that subsists in that technology. This can require a team of
advisers such as lawyers, accountants, technical experts and marketing personnel.


This method is based upon economic principles of substitution and price equilibrium: the
investor for the IP or associated technology will pay no more than the cost to obtain an
asset of equal utility (rather than functionality).

The cost approach may be useful:

• where the target IP is new and exchangeable for another intangible asset such as
software where different code may be written to create the same function;

• where the workforce is the main component that makes the IP worthwhile. This may
be so where the IP is in the form of know-how or the IP related assets require
ongoing input by personnel for that IP asset to be contributing to the business of the
enterprise. An example of this may be operational manuals, policies and records. The
appraiser must assess whether the IP is the subject of the valuation or whether the
intangible asset being valued is in fact the workforce or the know-how held by that

• as a guide to reproduction at an earlier time;
• to assist in preparation of balance sheets;
• to value highly specialised property such as software, engineering drawings or

distribution networks;
• where royalty rates are set as a fair rate of return on the cost-based value of the IP;
• when estimating the amount of damages suffered by the owner of the IP in an action

for infringement of its IP rights;
• to acquire insurance for the IP against the cost of recreating the IP or the associated

• to estimate the remaining useful life of the IP or associated technology.

The cost approach, however, does have its limitations. It does not reflect the economic
factors that apply to the technology such as current demand for like assets and competitor
activity. It does not reflect the economic life of the IP and risk is not directly factored into
the cost approach. Obsolescence must be separately calculated to ensure the valuation is
made on present day terms. Of greatest significance in the context of commercialisation of


IP, the cost approach will not inform an enterprise or an appraiser of the likely price a
person may be prepared to pay to acquire the IP.

The application of the cost method involves consideration of the costs of materials, labour,
overheads, and an appropriate margin for profit on such cost elements that encompasses an
incentive for the entrepreneur to undertake the development. To the extent that this
involves accounting for historical costs the dollar value of those past costs needs to be given
a present day value by applying a factor for inflation such as the consumer price index.

The costs should be specifically associated with the development of the IP. This may present
difficulties where the research plan and budget resulted in more than one form of IP, one of
which is not the subject of the valuation. The appraiser will continue to allocate costs
incurred until the asset has been developed to a commercial stage. The appraiser will need
to make assumptions if the development of the technology is at an early stage.

The total cost may need to be discounted to allow for the fact that the IP may be specific to
a business of the enterprise and its full value to the transferor may not be fully achieved
when owned by the transferee. Also, an asset used in a profitable business is likely to
achieve a higher valuation that reflects the contribution of that asset to the profit earning
capacity of the enterprise.

There are two standard methods of applying the cost approach, known as cost of
replacement and cost of reproduction. COST OF REPLACEMENT

The test applied by this approach is to assess the cost for the enterprise to replace the
technology with the equivalent utility or functionality. This approach seeks to reproduce the
utility, but not necessarily in the same format as the IP that is the subject of the valuation.
This approach does take account of market demand in part because if there is no demand
for the constituent elements of the technology then that will be factored into the cost of
that element in determining the total replacement cost of the technology.

It may be appropriate to use the cost of replacement method to:

• choose between developing the technology in-house or licensing another person to
do so;

• determine the minimum or 'floor' royalty that the licensor would accept;
• measure partial loss for insurance purposes.

This approach can involve the assumption that the IP, or the technology in which the IP
subsists, has utility greater than what is the subject of the valuation. If so, the appraiser
needs to make allowance for this in the valuation. COST OF REPRODUCTION


The cost of reproduction method is used on the premise that a replica of the IP will be
made. That is, what would it cost to recreate the IP in the same format as the IP that is the
subject of the valuation? This method may be useful to compare with valuations determined
by other approaches to the valuation of the target IP and to measure partial loss for
insurance purposes.

The appraiser, when determining costs incurred in the making of the IP or associated
technology, will consider whether the IP was developed in accordance with established
guidelines rather than by a trial and error process. If no such guidelines existed then the
appraiser will allow for costs inherent in a trial and error process. DEPRECIATION AND OBSOLESCENCE

Depreciation should be applied to the cost methods to allow for deterioration to the asset
over time. Forms of depreciation include physical deterioration (which would not usually
apply to the IP itself although it may apply to the technology in which the IP subsists),
technological obsolescence (where the original function associated with the IP is not in
demand), functional obsolescence (where the IP cannot fully fulfil the original function and
which may result from the inherent nature of the IP or be due to external influences) or
economic obsolescence. Each of these forms of obsolescence should result in the value of
the IP being reduced. INTERNATIONAL ISSUES

Application of the cost approach across international boundaries presents its own
considerations. The appraiser will need to consider separate taxation regimes,
transportation costs, costs of supporting the IP and the associated technology and different
obsolescence effects across countries. DATA REQUIRED FOR COST APPROACH

The appraiser will seek the following types of information in order to apply the cost

Material costs:

Those costs that relate to the cost of tangibles used in the development of the IP and
associated technology, such as computer lease costs, diskettes, books, and licence fees for
software used.

Labour costs

Those costs arising from human endeavour in developing the IP and associated technology
such as wages, salaries, fees to contractors, workers compensation insurance costs,
superannuation contributions and other employee related taxes payable by the enterprise.


Overhead costs

These need to be apportioned and the enterprise will usually be in the best position to
provide the relevant figure, which can be verified by the appraiser.

Redevelopment information

The information required to enable the appraiser to calculate the cost of recreating the IP or
technology including time and resources.


A component should be included to reflect an incentive for the developer of the IP (which
mayor .may not De the enterprise) to have undertaken the development and the enterprise
for endeavouring to make a commercial profit from the IP. This is largely a matter of
judgment for the appraiser although the enterprise may have certain policies on the extent
of return it would be expected to achieve in order to undertake the development of the IP.


The test applied by this approach is: what is a comparable price or royalty that could be
achieved by similar technologies or IP? If relevant market information is available this
approach can represent the most reliable and accurate form of valuation. That is a big ‘if’
when trying to value IP, for the reasons discussed below.

Unfortunately this test requires the enterprise to identify a comparable product, the sale
terms under which the comparable product is exploited and the existence of independent
parties dealing with the exploitation of the technology. Allowances need to be made for the
passage of time between the valuation date and the date of the comparable transaction.
Evidence of a transaction for comparable IP may not represent the indicative value of the IP
that is the subject of the valuation because that transaction may have encompassed a range
of influences and assumptions that are not applicable to the target IP.

Applying the market-based approach requires significant time and effort to research market
information relevant to the target IP. This has cost implications for the enterprise when
engaging the appraiser. Depending upon the extent and reliability of information available it
may be possible for the enterprise to determine royalties on the basis of 'norms' for the
applicable industries. AUCTIONS

The cleanest form of determining market value of an asset is by auction.

Difficulties of auctioning IP include:

• insufficient number of bidders. IP is usually specific to a particular application;


• publicity costs, time required to adequately notify potential bidders and time needed
to assess the technology or IP;

• further ongoing involvement of the enterprise is often required to assist the
purchaser to make full use of the IP or technology;

• proving that the technology in which the IP subsists is well-developed.
• International issues

Application of the market approach to IP across countries will depend upon the countries
that need to be considered. For example, information about relevant markets in the United
States may be readily available but that information may not be as robust for markets in
developing countries. The law of the country may have a strong influence on market

Valuation by the market approach depends upon access to public information. This type of
information includes data obtained from the applicable market and assessment of the
market conditions that apply at the valuation date. Examples may include:

• stock market variations that can be confined to changes to intangible assets and IP in
particular. This may involve business decisions affecting a specific brand of the
business. For example, Philip Morris on one day ('Marlboro Friday') decided to
reduce the retail price of one of its best known branded products by 20 per cent to
slow down the advancing market of generic products. There was significant slump in
the share price by 23 per cent in one day;

• where the share price of a company includes a premium that is based upon the grant
of IP registration. For example, a failure to renew patent may result in the share
price falling once that information is announced.

The appraiser will need to acquire evidence of comparable transaction (such as licensing
terms, sales of assets and business that have involved the transfer of IP). Assuming this can
be done, the appraiser should consider whether the market is truly comparable and if not,
whether some allowance can be made for the differentiating factors. The client will often
have a great deal of information about applicable markets. This will greatly assist the
appraiser. The appraiser can assist this stage of the process by determining which
information is relevant. For example, can software used for one industry be applied for
another industry? Are the transactions sufficiently recent?

Even if information is publicly available concerning the transfer of IP, it is unlikely that the
circumstances applying to one technology will be comparable to the technology that an
enterprise wishes to value. For example:

• industry: the industry in which the technology is applicable affects the valuation. The
cycles experienced by the industry and the competitiveness of the industry will
influence the valuation;'

• emerging technology: the valuation must account for the likelihood of a new
product superseding the enterprise's technology. This will affect the future earning
capacity of the IP;


• barriers to entry: for example, legislative requirements for therapeutic goods or
chemical approval present barriers to entry because they impose a delay upon new
technology being available to the market;

• growth in income: are the products receiving or likely to receive the same level of

• lifespan: will similar periods or similar robust legal foundations protect the
comparable products?

The information required for a market-based valuation makes it almost impossible for a
small technology-based enterprise to understand the value of its IP. One methodology is to
identify a publicly listed company that has a comparable business. By doing so the appraiser
can understand industry cycles, competitive pressures, barriers to entry and emerging
technologies and reasonably extrapolate those elements to the enterprise. The comparable
company should be a company in which institutional investors have a shareholding, there is
active trading in its stock and the company has released publicly available information.
These factors will give comfort to the appraiser that the share price of the comparable
company reflects a valuation given by risk adverse but profit seeking investors. The task of
identifying such analogous public companies will not be easy.

Once the data for the market approach has been collected and analysed the appraiser will
seek to verify that:

• the data is factually accurate: this involves checking the source of the data (which is
difficult because transaction documents are usually kept confidential) or by some
other cross check such as access to multiple sources of information. Alternatively,
the appraiser can contact participants to a comparable transaction seeking
confirmation of the details that have been reported to the appraiser.

• the transactions considered were at arm's length: were the parties to the
transaction related? Was a party to the transaction close to insolvency or otherwise
has a significantly inferior bargaining position? Was the transaction part of a litigious

• the data and transactions relate only to IP or associated technology: this can be
difficult because often the transfer of the IP will be part of a broader transaction
such as the sale of a business. Nevertheless, an appraiser may be able to determine
the value of the IP contained in that sale by working backwards from the known sale
price of the business enterprise provided of course that the appraiser has access to
other information concerning the comparative business. This may involve applying
the subtraction method where the value of net working capital (current assets less
current liabilities), tangible assets and non-IP intangible assets (including software,
workforce, contracts, distribution networks) are subtracted from the known value of
the overall business.

The appraiser will often seek guidance from the enterprise that assumptions made about
the comparative transactions are reasonable to the extent that the enterprise is in a
position to offer an opinion. It is prudent for both the appraiser and the enterprise to keep
sound written records of such discussions to ensure that risk is appropriately borne,
notwithstanding the terms of any contract between the appraiser and the enterprise.


The enterprise can assist the appraiser by providing the following types of information
relevant to applying the market approach:

• giving information about other transactions known to the enterprise that may be
comparable to the target IP or technology;

• identifying the premium paid on a product where the IP is the distinguishing feature
between the product being valued and its competitors;

• providing contacts in the relevant industries from whom the appraiser may make
further investigations;

• describing the potential uses and demand for the IP and technology;
• explaining the importance of the IP to the business operation including frequency of

use and whether it could be equally important for other businesses;
• supplying reasons why potential comparable transaction may not satisfy

comparability criteria which would be verified by the appraiser.


The objective of the income approach is to determine future income, measured in present
value, that can be expected from the IP or the associated technology. It is important for the
enterprise to recognise that the appraiser is seeking to determine the expected income that
can be earned by the target IP or technology. Income earned by other or related intangible
assets is not relevant. It is important to note that 'income' in the context of valuation of IP
or a business is a reference to cash flow rather than accounting profit.

There are three essential elements to the income approach:

• identifying the potential income that can be generated from the asset;
• assessment of the duration of that income stream; and
• assessment of the risk associated with the forecasted income. Determining potential income

The task of determining the income stream will be influenced by:

• whether the income stream could be expected to be constant or not;
• whether the measure of income relates to revenues to be earned or savings to be

achieved {either from decreases in expenses or investments};
• whether the projected income will be generated by use of the IP {such as use of a

trademark} ownership of the IP, licensing of the IP (to or by the enterprise) or a
decision not to use the IP {which may protect the competitive position of the

Past income generated by the IP may be an indicator of projected income although the
appraiser will need to carefully consider factors that may influence changes to historical
income streams. The measure to be applied in the valuation of IP will also influence the
information required by the appraiser. There may be a range of measures of income such as


gross or net revenues, net operating profit, profit before interest and taxes, cash flow after
tax or net cash flow after tax. If the appraiser is applying a measure that is other than gross
revenue, allowance must be made for expenses incurred in generating the income such as
cost of goods sold and overheads.

There are various forms of the income approach, which have been categorised as1:

• methods that measure the incremental increase in income that would be derived
from the use of the IP or new technology. A common form is comparing the price
payable of a new patented pharmaceutical that addresses the same illness as a drug
that does not use that patent but is still applied for the same illness or the price
payable for a branded shirt compared to a generic shirt;

• methods that measure the decremental decrease in costs that would be derived
from the use of the IP or new technology such as use of a patented machine that
lowers the cost of producing a shirt;

• methods that estimate the costs saved by not having to pay a royalty for the use of
the IP or technology (known as the 'relief from royalty method'). This applies the
concept that the enterprise owns the IP and therefore it does not have to pay a
licence fee to acquire that IP. This approach can also be categorised as a market
approach to valuation because it relies upon information from the market;

• methods that quantify the difference in the value of the overall business of the
enterprise due to owning the IP or technology;

• methods that estimate the value of the IP or technology as a residual from the
overall value of the value of the enterprise or as a residual from the value of an
overall estimation of the value of the intangible assets of the enterprise. This
approach involves applying a suitable rate of return to all the assets of the enterprise
and then subtracting from those known values to determine the value of the target

Not only must the appraiser consider the period over which the IP will generate income for
the enterprise but also the periods within that 'life of the asset' that may generate different
levels of income. This will affect the method of calculation used by the appraiser in
determining the income stream ASSESSING THE RISK - DISCOUNT RATES

Income expected to be received in the future must be recalculated to a figure that reflects
value in present day terms. The rate that converts projected future income to present value
of that income is referred to as the 'discount rate'. The discount rate is a combination of a
'risk free' assessment rate (such as the rate obtained with government bonds) and a rate
that reflects the degree of risk associated with obtaining the expected returns from the
particular investment.

1 see Robert F Reilly and Robert P Schweihs, Valuing Intangible Assets, McGraw-Hill, 1999, p 114

Knowledge of the present value can be important in negotiations for licensing of IP. The
payment income streams determined for licensing fees may be lump sum, periodic or
continuous. By applying an appropriate discount rate the licensor can assess whether the
proposed licence fees reflect an appropriate rate of return.

The discount rate is influenced by:

• inflation: which reduces the purchasing power of the income stream. A real discount
rate must be applied to equivalent real income streams, not income that is adjusted
for inflation;

• liquidity: cash has the greatest utility. The easier it is for the enterprise to convert
the asset into cash the greater economic security it will have. IP assets tend to be
difficult to readily convert into cash;

• risk Fee interest rate: if the enterprise could have used the funds to invest in a
secure income producing asset it would be paid a specified interest rate. That rate
reflects the opportunity lost by the enterprise by it investing in the development of
the IP. A common measure of such rates are the rates of return paid on government

• risk premium: an allowance made to account for possible loss of the projected
income streams and the potential for those income streams to vary over time. The
degree of risk will be influenced by the nature of the IP, the stage of technological
development and the nature of the market (degree of demand, number of suppliers,
level of competition, barriers to entry).

It has been suggested that investments in emerging technology carry higher risks with
considerable potential for complete loss of the initial investment. In these circumstances the
rates of return expected by the venture capitalists (who assist enterprises to commercialise
such high risk technology) are an appropriate guide to the applicable rate of return2.
Typically discount rates used for valuing IP are greater than 30 per cent. INTERNATIONAL ISSUES

The principles of the income approach are well understood internationally. However, the
accounting standards between countries may vary and the currency to be applied to the
projected income may be an important factor. The legal regime concerning the protection of
the IP and the transfer of income between countries may need to be considered. The
political circumstances of a country may influence the risk to be applied for determining the

The following types of information will often be used by the appraiser to apply the income
approach (depending on the methodology that is adopted):

2 see Gordon V Smith and Russell L Parr, Valuation of Intellectual Property and Intangible Assets, 3rd
ed, pp 555-6


• the projections made by the enterprise concerning future selling prices, market
share and volume of product that will be sold, cost of goods sold, future capital
expenditures, the rate at which the market takes up the product (penetration rate),
marketing and selling expenses (all of which would be verified by the appraiser);

• length of time required to obtain regulatory approval for use of the IP and/or its
associated technology;

• the length of time it would take competitors to re-engineer the IP and/or its
associated technology;

• the risk of technical failure associated with introducing the associated new
technology into the market;

• historical information regarding retail prices, sales, costs profits of the targeted IP
and technology and that of related competitor IP or technology;

• manufacturing information: what equipment and labour are needed and the
associated costs;

• the extent of further development and R&D expenditure required to bring the
technology to a useful commercial stage;

• marketing: competition issues, selling prices, market opportunities, market cycles;
• legal: regulatory requirements to enable the technology to be exploited and IP



Knowing the various valuation methods places us in a better position to know what the
appraiser is talking about. If we know how these methods apply to various forms of IP the
enterprise can focus on factors that will assist the appraiser, hopefully derive a robust
valuation and be well placed in contract negotiations with other parties to the commercial

In some cases, such as computer software, more than one form of IP will subsist in the
technology. The purpose for which that technology is applied will have a bearing on the
appropriate valuation method to be applied and the information to be gathered.


The cost approach is based upon the assumption that an investor wishing to acquire
copyright will not pay more than the cost to purchase or construct a substitute property.
Since the Copyright Act 1957 vests in the owner of the copyright monopoly rights in the
copyright work it is not legally possible to create a substitute version or 'copy' of the
copyright work unless the creation is done independently of the copyright work. The cost
approach therefore can only provide the enterprise with an indication of the lowest possible
value of the copyright work, being the cost incurred in creating that copyright work.

The application of the replacement cost method may result in a lower valuation than the
application of the reproduction method (the cost of constructing an exact replica of the


copyright work) due to technological advances, particularly in relation to computer software
copyright works.

The appraiser will need to account for any obsolescence relevant to the IP or technology.
This will include considering whether the technology is maintained and enhanced.
Technological obsolescence may occur in relation to software if the software is not written
in up-to-date language or is reliant upon an outdated platform. MARKET APPROACH

Obviously much depends upon the nature of the copyright work. Software, for example,
may have a ready market from which appropriate market information can be obtained to
enable the market approach to be applied. However, firm evidence of market transactions
can be difficult to obtain because the parties seek to keep the transactions confidential.

Licensing of copyright works presents the most reliable form of market information that can
be used to value the copyright. INCOME APPROACH

Any or all forms of the income approach methodologies (incremental analysis, profit split or
royalty income) may be applied depending on the nature of information available to the
appraiser. The appraiser must form a view as to the useful life of: copyright work for the
purposes of determining the income stream and this will often be less than the legal life of
the copyright work, particularly for computer software.

Information that is relevant to a copyright work includes the remaining legal and economic
life of the work, which of the copyrights are being used and any known impediments to the
use of the copyrights.

The appraiser may also refer to:

• information provided by Copyright Agency Limited;
• decisions by the Copyright Tribunal and courts in which there may be a market for

the copyright work;
• professional societies such as LES or International Licensing Industry and

Merchandisers Association.


The greatest difficulties in valuing trademarks and brands is separating other factors that
contribute to the success of the product or business that is designated by the trademark or
brand. An enterprise may use more than one brand to generate its income. Often the
enterprise will leverage off a core or primary brand. Valuation of contributory factors and
secondary brands need to account for the influence of the primary brand upon the
estimated value of the secondary brand.


Valuation of domain names faces similar issues as trademarks and brands. The context of
web pages and the internet in general presents a special flavour for the appraiser. Any laws
that prevent the use of the domain name by a regulatory entity will restrict the value of the
domain name. Current registration requirements for the registry prevent
registration unless the domain name is linked with the name of the applicant. The value of
the domain name may be inseparable from the website and its popularity will be due to the

The cost of reproduction approach is possible if historical data is available concerning the
creation of the brand. The cost of replacement approach would not usually be applicable
because the brand will be unique and so theoretically the brand cannot be re-created in
some other form.

The cost approach would usually be expected to indicate a low valuation which would not
truly represent the market value of the brand. The brand may be the result of the use of a
name, an informal brainstorming session or have involved the engagement of experts,
designers and market analysts. The recognition of the brand may result from the lapse of
time or a concerted marketing strategy. The costs incurred in the development of the brand
may be small or significant. MARKET APPROACH

The market approach may be useful if the appraiser has data of assignments of brands that
are comparable to the brand that is being assessed. Unfortunately, it is rare for such data to
be publicly available. It is possible to resort to the subtraction method although many
businesses will have more than one brand and unless discrete figures are known for each
brand it may be difficult to reliably deduce the valuation applicable to the comparable

The brand can be valued on the basis of the royalty income that it could generate by
licensing to others on an arm's length basis. An important factor is the assessment of the
remaining useful life of the brand. A registered trademark may be registered forever by
maintaining appropriate renewals of registration. The market value of the brand, however,
may be less if the goodwill associated with the brand is diminished due to poor performance
of the enterprise or the industry in which the enterprise carries on business.

If the market information is available a brand may be valued by reference to the premium
price payable for the branded article compared to generic goods of the same type. INCOME APPROACH

The difficulty with the income approach is establishing the link between income projected
and the brand because the brand is one mechanism to attract clients whereas enterprises
will apply a range of strategies to attract clients. The projected life of a brand depends upon
a broad range of factors such as the support given by the enterprise to the maintenance of


the brand, the performance of the enterprise itself and the trends experienced in the

The appraiser may refer to:

• the influence of primary trademarks upon the target secondary trademarks;
• the attention and support provided by management of the enterprise to the

maintenance, marketing and development of the brands;
• advertising and promotional expenses as reported by the enterprise in its financial

statements and accounts;
• historical revenue received that relates to the trademark or brands;
• brands of competitors to the enterprise;
• the market share enjoyed by the products or services that are marked by the brand

and the ability of that brand to influence the market;
• the level of demand for the branded products and the trend for that demand over

• the retail price of the branded products or services and the retail price of generic

forms of the same types of the goods or services;
• evidence of transfers of brands of other companies in the same or similar industries

to the enterprise;
• development and maintenance costs concerning the brands .
• information relating the strengths and weaknesses of the brands of the enterprise;
• whether the brand is registered as a trademark, the jurisdictions in which it is

registered, the degree of infringement activity and the response of the enterprise;
• decisions by the courts in which there may be a market for the brand or similar

• specialist texts or external data resources concerning trademark licensing.


All three standard valuation approaches can be applied to the valuation of patents.
However, the usefulness of the approaches varies according to the integrity of the
information available. The legal life of a patent will often outlast its economic value as new
innovations cause the target patent to be superseded. Whether this is so will depend upon
the scope of the claims within the patent and the breadth of the potential applications.

The significant costs associated with developing patent related technology and applying for
and maintaining patents are an incentive for an enterprise to understand the value of the
patent and related technology as early as possible. In this context 'rules of thumb' may be of
assistance where a qualitative methodology has greater influence than a quantitative
analysis that may be associated with the three standard approaches3.

3 see, for example, Robert S Bramson, 'Rules of Thumb: Valuing Patents and Technologies', Les
Nouvelles, Vol XXXIV, No 4 December 1999, p 149


Similar issues apply to confidential information except that the potential legal life of this
form of IP is limitless. Confidential information is often linked with people who have the
know-how and the secrets. The scope for those people to leave the enterprise will need to
be considered by the appraiser. The appraiser will also consider the procedures applied by
the enterprise to prevent unauthorised disclosure of the confidential information. COST APPROACH

Application of the replacement cost method will result in a valuation of technology that has
the same utility as the target patent and related technology. The appraiser will need to
account (or discount) for the fact that greater utility may have been achieved because
contemporary creation methods are assumed to be used in the development of the
technology. Allowance must also be made for obsolescence.

The appraiser will need to tread carefully to distinguish between R&D expenses that led to
the patented technology and those expenses that were indirect to it or led to a separate
form of technology. The lapse of time between the incurring of costs of early research and
the time of valuation may prevent identification of the relevant costs. MARKET APPROACH

The market approach is often used for patents because there will usually be an existing
market for a comparable product. Of course, there will be occasions when the 'next big
thing' arrives where the innovation has no obvious market demand. In these circumstances
the market approach may be inappropriate. INCOME APPROACH

Projection of income derived from patents can be estimated by having regard to the
premium in pricing of the patented article that would be lost if the patent expires and
generic articles are able to be legitimately produced. This can be witnessed in relation to
pharmaceutical products when the patent of the drug expires. In some instances a
pharmacy company may develop its own generic drug to develop a brand allegiance before
the expiry of the patent. In those circumstances the price differential between the two
drugs will be a reasonable basis for valuing the patent. The appraiser will need to consider
the factors that may prevent direct comparison between the goods such as increased
branding and marketing costs for the generic product.

The IP rights associated with patents are inter-linked with the product or process that is to
be sold. This means that the market approach will be a useful check against projected
income. The income approach can be used to assess savings from greater efficiencies in a
manufacturing process that is the subject of a patent.

The expense associated with developing innovation (particularly in the biotechnology fields),
participating in clinical trials and prosecuting multi-jurisdictional patents is well known.
However, R&D costs will not be relevant to determining valuation on the basis of the
income approach.


The portfolio of products or technology that the enterprise has in the pipeline will influence
the risk factor that the appraiser applies. In relation to the development of drugs, only one
in five thousand compounds that enter into the preclinical-trial testing graduate to human
testing and after that, only one in five are approved4. Even fewer are actually marketed. So
the enterprise that relies on one patented product will bear a greater degree of risk.

Other factors that will affect the risk discount applied to determine the value of patent

• the likelihood of the patent being granted;
• whether the patent is standard or innovation;
• the period of time in which the patented product will be in demand once it reaches

the market;
• the position that the technology will achieve in the market;
• the degree of control that the enterprise can exercise to prevent competitor


The appraiser may refer to:

• financial statements, accounts and budgets;
• payroll, time recording and laboratory records;
• details of technology licensed-in by the enterprise;
• descriptions of trade secrets and other confidential information used by the

• the stage of development of the technology;
• the legal and economic life of the patent;
• market opportunities;
• competitor technologies;
• barriers to entry into the market.


The valuation report is the primary outcome or deliverable that the enterprise expects to
receive from the appraiser. The final report presented by the appraiser to the enterprise
would be expected to:

• conform with relevant professional standards applicable to the valuation of
intangible assets. In the United States, appraisers of tangible or real property are
expected to conform with the Uniform Standards of Professional Appraisal Practice
(USPAP) which sets out reporting standards, documentation and record retention

4 : see Bratic V W, Tilton P and Balakrishnan M, 'Navigating Through a Biotech Valuation' at


requirements5. There is not an Indian equivalent to the USPAP, although there is no
reason why the principles contained in the USPAP standards could not form the basis
for the services to be performed by an Indian appraiser of IP. In particular the USPAP
requires that any appraisal report not be misleading, contain sufficient information
to enable the intended audience to understand it and accurately reflect and disclose
any extraordinary assumption that directly affects the appraisal (including the impact
that the assumption has on the value of the IP);
• provide a clear statement, free from jargon, of the estimated value of the IP or
technology and the reasoning behind that conclusion. This description should be
sufficient to reflect the complexity of the task and the impediments that were found
in undertaking the appraisal;
• have an analysis of the market conditions that influenced the conclusion and an
analysis of known trends that might affect future income that may be earned from
the IP or technology;
• include appropriate documentation supporting the conclusion and analysis;
• incorporate any assumptions made in the course of preparing the report, which
should have been cleared with the enterprise before the task was commenced, or at
least, before the final report is submitted;
• include a statement of contingent and limiting conditions and any professional
qualifications responsible for the valuation;
• explain the reasons for any decision not to use any of the standard methodologies
and any reconciliation of differences arising from the application of the different
• explain any adjustments made to financial information provided by the enterprise.

Standard Rule 10-3 of the USP AP states that each appraisal report must contain a
certification by the appraiser that conforms to a particular content. The appraiser confirms


The statement of facts are true the valuation was prepared in

and correct accordance with the USPAP

The appraiser has no interest in the engagement of the appraiser

either the target IP or technology was not contingent upon

or either of the parties who may developing or reporting

use the valuation predetermined results

The fee payable to the appraiser is the analysis, opinions and

not influenced by the valuation, conclusions are limited by the

the achievement of any particular express assumptions and limiting

result or the occurrence of an conditions and are impartial and

event directly related to the use of unbiased

the valuation report

5 see <>


The estimation of value of IP is a malleable process. It is no surprise therefore that normal
valuation practice entails the appraiser expressing his or her view as a range of values
stipulating expected high and low values. More often than not much reliance will be made of
known past transactions for IP that is similar but not really comparable. If the enterprise and
the appraiser do not reach an accord on their expectation both will be disappointed.
Nevertheless, the valuation of IP is often a necessary stage in the commercialisation of IP and
will be required by at least one party to a major transaction. Preparation of IP valuation and
an understanding of the methods and processes applied will enable the enterprise to critically
assess financial proposals from other parties and negotiate from a position of knowledge.


It is accepted in the present commercial scenario that brands do create wealth. Maximising
brand value is simply a function of maximising shareholder value; a goal that effective
managers of all quoted companies recognise. Companies have increasingly come to be
recognised and indeed reorganised around brands. Even in classic branded FMCG
companies such as Unilever, their importance has been given a higher priority. In their
recent reorganisation, premium brands worldwide were specifically named as a key
responsibility of the chairman of the operating divisions. This a far remove from the old
model of brand manager control.

Balance sheet issues may have provided the impetus for the development of brand
valuation, but its application does not stop there. There is certainly no doubt that more
information on brands, brand performance and brand value should be disclosed in financial
accounts. Companies are however vary of doing so and of disclosing the kind of information
that they feel is competitively sensitive, and unless this is done their statements concerning
brands end up appealing ‘like idle rhetoric’ and of little real use of investors.

Brand valuation can also be used in the planning and structuring of mergers and
acquisitions. A significant amount of explicit comment was made by both sides about brand
value in the Rowntree/Nestle and Granada/Forte takeovers, with all parties claiming to be
able to maximise the value of the brands involved.

A similar role can also be seen in investor relations. Merrill Lynch issued a broker’s circular
in 1996 that argued that the share price of Burmah Castrol would have to increase by
somewhere between 25 percent and 50 percent in order to cover the analyst’s estimates of
Castrol’s ‘brand value’. In a similar vein, both P & G and Unilever Annual Reports would not
be complete without the (respective) Chief Executives reiterating their commitment to
building their portfolios of leading brands. The purpose of such communication can also be
focussed for an internal audience, and indeed can be used as explicit benchmarks for
performance in rewarding management. Brand valuations of portfolios can also be used to
help the crucial task of resource allocation and as a tool for evaluating the success of the
decisions made!

Franchising and Licensing transactions, within corporations or with their third parties, are
increasingly popular and can also have implications for tax planning. Brand valuations have
also been used in supporting negotiations with tax authorities, in supporting court claims for


damages in cases of ‘passing off’ or in defending actions of unfair trading and even in
specific use of brands as a securitised asset to back specific borrowing.

Irrespective of its purpose, and recognising that it is only a single measure, it is no
exaggeration to say that brand valuation has become an important technique for evaluating
businesses. The growing importance of valuation mirrors the growing importance of brands
to the companies that own them.

One crucial aspect mentioned is the fiscal implication of charging international/overseas
subsidiaries and third-party licensees a proper royalty fee for the use of brands.
Organisations worldwide, particularly universities, have yet to realise that the royalty rates
they demand are negligible in comparison to the value of the trade mark or service mark
asset asset being licensed. Increasing the royalty rate demanded not only has managerial
benefits but also transfer pricing advantages.

This imbalance of power could, be greatly improved in two ways6:

• If companies took a more scientific approach to the setting of royalty rates rather
than relying on what has been done in the past.

• If companies pooled their royalty rate information so that they were as well
informed as the tax authorities with whom they were arguing.

The managerial and fiscal implication of trade mark licensing are profound and that brand
valuation has a key role to play in adding method and objectivity to an area which in the
past has been plagued by doubt and misunderstanding.


The valuation of brands is a relatively new concept and although brands are bought and sold
independently from other business assets, there is no identifiable market in brands as such.
Brand valuation is therefore claimed to be in part an art, not an exact science, and
necessarily involves judgment. It also involves specialists in three quite separate and
hitherto unrelated disciplines – marketing, accountancy and finance, and law. In order to
conduct a proper valuation an unusual, even unique, blending of professional skills is
therefore required. Also, any methodology must deal both with hard ascertainable factual
information (e.g. market shares, sales and profits) as well as rather ‘softer’ qualitative
information and skilled, professional judgement is needed in assessing brand strength and in
determining brand-related profit.

6 Interbrand [], is a good example of an institution actively
involved in both these areas. Having valued more than 1,000 brands in the past 6 years (with an
aggregate value of over $25 billion) Interbrand can with confidence assess service and product brands
and compute values and derive royalty rates that stand up to third-party scrutiny. Interbrand is also
initiating - with the sponsorship currently of half a dozen major branded goods businesses - a shared
database of royalty rates. This will enable companies to source information (protected, of course, by
rules of confidentiality) that can help them in justifying higher and more realistic royalty rates. The issues
of the role of licensing and the share of information is being studied by Interbrand and Preconcept



The value of a brand as encompassing the particular values attributable to the trademark,
logo, packing and get-up, as well as to the recipe, formulation or raw material mix. In other
words, brand value as a term embraces all the proprietary intellectual property rights
encompassed by the brand. Thus for the purposes of evaluation a brand has to be
understood as an ‘active trade mark’; a trade mark actually used in relation to goods or
services and which has, through use, acquired associations and value.

The Interbrand methodology, for instance, when used for balance sheet purposes, deals
with existing use and does not take account of any unrealized ‘stretch’ factors (e.g. line
extensions or licensing)7. Nor is it normally concerned with the break-up value of a
company’s brands or with the valuation that, under different circumstances, a third party
might put on them.


When developing an ‘existing use’ valuation methodology a variety of possible methods
have been explored. Premium Pricing

This system is based upon the extra price (or profit) which a branded product may command
over an unbranded or generic equivalent. However, the major benefits which branded
products offer to manufacturers often relate to security and stability of future demand and
effective utilization of assets rather than to premium pricing, so premium pricing is rarely an
acceptable method of brand valuation. Moreover, a strong brand which the retailer must
stock due to customer demand also provides its owner with a platform for the sale of
additional products and, at practical level, it should be remembered as well that many
branded products (for example, most perfumes) have no generic equivalents and in many
instances ( e.g. that of the Mars bar), it is difficult to conceive that a generically equivalent
product could be offered at anything like as keen a price as the branded product.
Furthermore, selling prices are often related to short-term tactical factors, a factor which
makes it difficult to apply any methodology based solely upon this concept. Therefore the
value of a brand clearly cannot be determined by premium pricing alone, though evidence
of a strong price premium may well serve as a clear indication of brand strength and may
therefore play an important part in a valuation. Esteem

There have been moves, particularly in the United States, to develop brand valuation
methodologies based principally on measures of brand recognition, esteem or awareness.
Although the Interbrand methodology recognizes that awareness and esteem can be critical
to a brand’s success (and are therefore factors to be considered when assessing the overall

7 This is a major oversight in the Interbrand valuation system, which perhaps needs to be worked on.
The impact of licensing, franchising and more importantly, line extensions, cannot be ignored.


strength of the brand), to build a model using as it scorner-stone such ‘soft’ measures is
inappropriate. Historical Cost

As balance sheets are traditionally drawn up on an historical cost basis it was necessary to
consider valuation systems based upon the aggregate of all marketing, advertising and
research and development expenditure devoted to the brand over a period of time. This
approach was, however, rejected quite quickly; if the value of a brand is a function of the
cost of its development, failed brands may well be attributed high values and skilfully
managed, powerful and profitable brands with modest budges could well be undervalued8. Discounted cash flow

The concept of using discounted cash flow (DCF) techniques to achieve a brand valuation is
attractive. Strong brands are, in effect, a form of annuity to their owners, so any system
which can accurately assess the value of future cash flows is entirely supportable. The
problem of DCF lies in its sensitivity; wide fluctuations can arise from relatively minor shifts
in inflation and/or interest rate assumptions. This factor, coupled with the range of cash
flows which can result from the differing brand development assumptions, means that DCF,
although conceptually a strong system, has to be handled with care. Even when these
difficulties can be overcome the valuer has the practical problem that he is generally given
little time to complete the valuation and often has to satisfy auditors. In such situations
modelling techniques using DCF can be hard to apply9. INTERBRAND’S ‘MULTIPLE APPROACH’

The approach most frequently adopted by Interbrand (and which is now, it must be said,
most widely used by others) is an earnings multiple system, i.e. appropriate multiple is
applied to the earnings of the brand. Conceptually the system is sound ( the arguments
which support a discounted cash flow system apply equally to an earnings multiple system)
and, practically, the system is robust, auditable and the valuation can be completed in a
relatively short time frame, provided always that the requisite marketing, financial and
trade mark legal skills are brought together. The system also has the real advantage that it
is based upon hard, proven ‘auditable’ data.

To determine a brand’s value, then, certain key factors need to be determined:

• Brand earnings ( or cash flows)
• Brand strength ( which sets the multiple or discount rate)

8 Also, determining the historical cost value of most brands would be a near-impossible task.

9 Notwithstanding this, the Interbrand approach detailed below is closely related to the DCF approach
and DCF techniques are frequently used in conjunction with the Interbrand ‘earnings multiple’ approach.


• The range of multiples (or discount rates) to be applied to brand earnings.

In addition, it is necessary of course to check whether or not the brand owner has, in fact,
title to the brand and also the quality of this title. BRAND EARNINGS

A vital factor in determining the value of a brand is its profitability or potential profitability,
particularly its profitability over time. However, to arrive at a balance sheet value it is not
enough merely to apply simple multiplier to post-tax profits. Firstly, not all of the
profitability of a brand can necessarily be applied to the valuation of that brand. A brand
may be essentially a commodity product or may gain much of its profitability from its
distribution system. The elements of profitability which do not result from the brand’s
identity must therefore be excluded. Secondly, the valuation itself may be materially
affected by using a singly, possible unrepresentative year’s profit. For this reason, a
smoothing element should be introduced; generally, a three-year weighted average of
historical profits is used.

The following issues must therefore be taken into consideration in calculating brand

Since it is the worth of the brand to the business which is being valued it is important that
the profit on which this valuation is based is clearly defined. For balance sheet purposes this
profit must be the fully absorbed profit of the brand after allocation of central overhead
costs but before interest charges. Taxation is, of course, also deducted, as will be explained
later. For the purposes of evaluating the brand, interest costs are ignored since the basis of
funding chosen for the brand is irrelevant to the brand’s performance. (Were interest to be
included in the calculation, the valuation could be materially affected by changes in
corporate financing arrangements; as such arrangements are generally not brand-related
they are normally excluded when determining profit).

The elimination of private label production profits

The profits to which an earnings multiple is applied must relate only to the brand being
valued and not to other, unbranded goods which may be produced in parallel with the
brand but which are not sold under the brand name. These profits may be separately
identified by the company through its accounting systems; alternatively, judgment may
need to be exercised in assessing the extent of such profits based on production volumes,
sales values or other acceptable methods. Insofar as ‘allocation’ is at the hear too much
accountancy, the elimination of ‘own label’ profits has been found to be entirely feasible.

The restatement of historical profits to present-day values


Since historical earnings from the basis of the valuation these values must be re-stated to
present-day figures by adjustments for inflation. This has the effect of ensuring that
performance is reviewed at constant levels

The weighting of historical earnings

A weighting factor is applied to historical earnings so as to determine a prudent and
conservative level of ongoing profitability to which to apply an appropriate multiple. Thus
once historical profits have been adjusted to present-day values a weighting factor must be
applied to each year’s brand profits, which reflects the importance of those profits to the
valuation. In many cases a simple weighting of three times for the current year, twice for
the previous year and once for the year before that is used. These aggregate earnings are
then divided by the sum of the weighting factors used.

Provision for decline

There is a basic accounting rule that benefits should only be taken when they are earned,
but that losses should be provided for as soon as they are known. This rule further implies
that, in a brand valuation for balance sheet purposes, future brand profitability must be
reviewed so as to see whether the profits on which the valuation is based will be
maintained. Where the weighted average historical earning are clearly below the forecast
brand profits in future years, no provision for decline is necessary, provided of course that
the forecast is reasonable and can be justified. However, it may be necessary to review the
weighting allocating if forecast future earnings are significantly in excess of the weighted
average profit value and are expected to remain at this level in the foreseeable future. It
could well be, for example, that historical profits may have been depressed by factors now
brought under control and it may be appropriate therefore to place greater reliance on
more recent earnings when arriving at a valuation. Where, however, the weighted average
earnings are greater than the forecast future brand profits, a provision for decline may be
necessary to reflect the reduced level of future profitability.

Remuneration of capital

For the purposes of a valuation, to apply a multiple to all the profitability of a brand
potentially overvalues that brand. Not all the resulting capital sum can be attributed to the
brand itself – some of it necessarily reflects the value of the other assets employed in the
line, e.g. the distribution systems, the fixed assets, and the management. Or, put another
way, if one fails to deduct a suitable return for the other assets employed on the brand
there will, arguably, be double counting on the balance sheet.

There are several ways of identifying a eliminating earnings that do not relate to brand
strength but the most frequently system is that of charging the capital tied up in the
production of the brand with the return one might expect in the production of the brand
with the return one might expect to achieve if one was simply producing a generic. Such an
assessment obviously requires analysis and judgment, but as a general rule the non-brand-
related returns one would expect in an industry where brands play a relatively insignificant
role (e.g. heavy engineering) will be greater than those where brands are critical to success


( e.g. cosmetics or fragrances). Provided one is dealing with the current cost of assets of
real return in the 5-10 per cent range is normal and can be used as a capital remuneration


The multiples we use are applied to the brand’s post-tax profit figures. Therefore it is vital
that all the reported earnings are collected on the same basis. A tax rate is normally applied
which is the medium-term-effective tax rate forecast for the company. BRAND STRENGTH

The determination of the multiple (or the discount rate in the case of DCF valuations) to be
applied to brand profit is derived from an in-depth assessment of brand strength, as it is
brand strength which determines the reliability of a brand’s future cash flow. The
assessment of brand strength requires a detailed review of each brand, its positioning, the
market in which it operates, competition, past performance, future plans and risks to the
brand. The brand strength is a compromise of seven weighted factors, each of which is
scored according to clearly established and consistent guidelines. These key factors are as


A brand which leads its market sector is generally a more stable and valuable property than
a brand lower down the order. The score highly in the area of leadership a brand must be a
dominant force in its sector with a strong market share. It must therefore be able to
influence its market, set price points, command distribution and resist competitive


Long-established brands which command consumer loyalty and have become part of the
‘fabric’ of their markets are particularly valuable and are normally afforded high scores.


Brands in markets such as food, drinks, and publishing are prima facie stronger than brands
in, for example, high tech. Or clothing areas as these markets are more vulnerable to
technological or fashion changes. A brand in a stable but growing market with strong
barriers to entry will thus score particularly highly.


Brands which have proven international acceptance and appeal are inherently stronger than
national or regional brands. Significant investment will have been incurred in the
geographical development of such brands and they are less susceptible to competitive


attack. They are, therefore, more robust and stable assets. Moreover, by no means all
brands are capable of crossing cultural and national barriers so those that are must be
considered as particularly valuable assets.


The overall long-term trend of the brand is an important measure of its ability to remain
contemporary and relevant to consumers, and hence of its value.


Those brands which have received consistent investment and focused support usually have
a much stronger franchise than those which have not. While the amount spent in
supporting a brand is important the quality of this support is equally significant.


A registered trade mark is statutory monopoly in a name, device, or in a combination of
these two. Other protection may exist in common law, at least in certain countries. The
strength and breadth of the brand’s protection is critical in assessing its strength. Indeed, if
the legal basis of the brand is suspect it may not be possible to apply a value to the brand at
all for balance sheet purpose.


It is perhaps important to examine technical aspects of valuation for balance sheet
purposes, both of ‘home grown’ and acquired brands. There are, of course, many other
situations where brand valuations can usefully be used and where the same basic
methodology can be applied. The assessment of the strength of the brand, for example, is
unlikely to change greatly whatever the situation (and this is the area of the valuation
process which normally requires the most detailed and time-consuming investigations)
though attributable brand earnings, and the appropriate multiple could vary considerably10.

It should also be noted that even when the valuation is based upon notional royalty rates or
upon discounted future earnings it is first necessary to identify brand earnings and review
carefully the reliability of future income flows. In other words, the key elements of this
methodology – the assessment of brand earnings and of brand strength – need to be
followed whatever procedure is used to derive a valuation.


The licensing of technological know-how and patents has been long-established and it is
accepted that often significant royalties should be paid by licensees for the use of such
assets. Moreover, the agreements governing such licenses are often very complex and
recognise that the maintenance of the value of the intangible asset is an important task and

10 In the case of acquisitions, for example, synergy benefits could be identified and incorporated into the
brand profits. Also it may be appropriate to include an acquisition premium.


is the duty of both the licenser and the licensee. Until recently, however, trade mark
licenses were not treated a seriously and indeed sometimes were just added in as the ‘icing
on the cake’ of patent/technology licenses. But the increasing awareness of the value of
brands has prompted brand owners to wake up to the notion that, although intangible, such
properties do have significant value and that their licensing cannot be regarded as a mere

One of the first effects of this is that license agreements with third parties now pay much
more attention to the fact that the property being licensed is valuable. Higher royalty rates
are being demanded (and justified) and stricter conditions to ensure that proper use and
maintenance of trade marks - both in legal terms and in marketing terms - are put in place11.
For example, licensees will often now participate with the brand owner in the development
of global advertising campaigns and the design of visual identity programme. It is only in
this way that the integrity, and thus the value, of a brand can be safeguarded.

But trade mark licenses are not only being used with third parties. Many companies (of
which Nestlé is the most famous example) have a policy of owning all intellectual property
centrally and charging subsidiaries for its use. Thus, for example, even though many of the
brands acquired as part of Rowntree are purely British brands (Quality Street, After Eight,
etc.), they are all now owned by the Swiss company and licenses back to the English
company. This has a number of implications:

Use of brands in controlled centrally and directed to the benefit of the whole group and not
just of a subsidiary.

The maintenance of brand rights - such as registering and renewing of trade mark
registrations, policing, prosecuting infringement and passing-off actions - is co-ordinated
and carried out consistently across the world rather than being left to the interests or
abilities of local management.

The licensing of brands, and the charging of brand royalties, rescues brands from the closed
world of the marketing department and makes their value the responsibility also of financial
and legal departments. Their position as an asset of the company - rather than a toy given
to amuse a junior Brand Manager for a few years - is crystallised.

International brands, whose marketing may be shared by more than one company within a
group or even by more than one division, are centrally co-ordinated to ensure maximum
coherence in terms of brand image, product development, advertising, etc. (e.g. Philip
Morris’ management of the Marlboro brand).

Brands can more easily be extended into new areas and licensed to other subsidiaries while
firm control is still kept on the integrity of brand equity (e.g. Nestlé’s extension of the Aero
brand through Chambourcy).

11 For example, it is not uncommon to find third party licensees (and not just of luxury goods brands)
being subjected to the strictest quality inspections. Their duty as licensees is more onerous but at the
same time their contribution is seen as greater.


Operating companies are made aware that the brands they use are as much a shared
resource, and a property of common value as, say, research laboratories, recipes and

Country managers can be made responsible for the local maintenance and development of a
global brand. Their contribution to brand value is after all a contribution to shareholder
value and should be rewarded accordingly.

Internal licenses, whether within the home country or overseas, increasingly incorporate the
payment of a royalty which reflects the true value of the asset being used rather than just
being a nominal amount to ‘cover administration’. Making a financial charge for the use of a
trade mark (or other intellectual property) focuses the user on the value of the asset and
the need both to protect and exploit that value.

The royalties received from licenses to overseas subsidiaries can be used to repatriate funds
in return for the use of a genuine piece of property. This can have major fiscal implications.

New licenses negotiated within the group, with joint venture partners and outside the
group, can be place in a context of genuine brand licensing and realistic royalty rates giving
the opportunity to negotiate much higher returns for the use of brands than has been the
case commonly in the past.

Brand valuation has made a critical contribution in all of these areas both in raising
awareness of the concept of brand value’ and in putting a monetary value to a brand.
Insisting that a brand has value is one thing; being able to state what that value is the best
way to make the maintenance and development of that value part of company strategy. It
also helps to communicate to the outside world that the company takes its brands seriously.

One field in which brand valuation and the concept of brand value is beginning to have an
impact is the area of trademark licensing. In the recent years there has been a marked
increase in the attention given to the licensing of trademarks as well as other intellectual
property such as copyright, patents and designs.

The notion of a license is a simple one: the owner of a piece of property allows another
party to make [commercial] use of that property in return can expect some form of
compensation. The party [individual or commercial entity] issuing the license is called the
licensor; the party receiving the license is called the licensee.

Licences need to define a number of elements, especially the following:

• The element of property to be licensed [for example, the right to use the trademark,

• The entity to which the property is being licensed [for example, the local education
centre now entitled to term itself an NIIT franchisee].

• The geographic extent of the licence [for example, only in India, or a particular state,
states or region].


• The commercial extent of the licence [for example, only for the manufacture and
distribution of a particular product or class of product].

• The duration [for example, for a period of five years from the date of the licence].

Because of the desire of the owner of the property to safeguard what is being licensed and
ensure that the licensee does not undermine its value, licences usually include strict
provisions covering quality control for both production and marketing, reporting of
performance, collaboration with licensor and other licensees and conditions for

Licenses will also define in one or more of a variety of ways the manner of calculating and
remitting compensation. ‘Royalty’ is assessed as a percentage of sales, mostly as a
percentage of gross profit or net profit. Often maximum or minimum amounts are
stipulated, and also the rate may decrease or increase with volume on a sliding scale.

It is also important to recognise that the amount of a pure royalty may be reduced or
eliminated by the use of other means of gaining compensation for the use of the brand: a
management fee, an extra contribution to advertising and promotional expenses, the rent
on a retail site or the price of a raw material that the licensee is obliged to purchase. For
example, agreements between Coca-Cola and its third-party bottlers do not require an
explicit payment for the use of the ‘Coke’ brand. Instead the licensee will be required to
purchase the essential sticky brown concentrate for making a Coke-branded cola at a given
price and in certain minimum quantity.

Though the payment for these products may appear to be for a tangible transfer, it is clear
that the amount that can be demanded is influenced as much by the trademark rights that
go with the product as by the qualities of the products themselves. It is only by buying these
ingredients or products that the licensee can make use of the brand, and so the charge for
the use of the brand is hidden within the charge for buying the tangible elements.



One of the core considerations in valuation is ‘brand strength’: the commercial viability of a
brand based on the positive touch points and experiential goodwill. Brand Strength is based
on attempts to access the relevant beliefs, associations and attitudes that are in consumers’

The explanation of the whole branding phenomenon put great emphasis on the meanings
and associations that a brand can create in the mind of the consumer. In other words, the
obvious place to anatomize the strength of a brand should be the consumer’s mind.

David Aaker, visualizes each brand name as a ‘box in the consumers brain’, in which are
stored away all the bits of information and associations to do with that brand. The whole
box is then in turn stored with positive or negative feelings. This is as good an image as any,


although like all metaphors for how the mind works it is likely to be too simplistic and we
can try to gather about what goes on the consumers mind:

Awareness – whether there is a box for our brand there at all, or whether it is easy to find.

Associations and beliefs – what is in the box? This is a big area in itself with many
dimensions to it.

Attitude – how the consumers feel about a brand, positive, negative, indifferent.

Each of these areas can be interpreted to tell us more about an aspect of a brand’s
strength.’ One could say a brand is strong because many people have heard of it or
spontaneously think of it, one could certainly say it is strong if many people express great
loyalty or affection for it. In their words and actions. Most importantly, a brand can be
called strong if it is strongly associated with imagery or functional benefits that we interpret
as desirable for consumers.

Brand Strength is based on attempts to estimate the brand’s future performance and profit
streams, and thus put a financial value on the brand as corporate assets:

There is perhaps, a thin line between asking someone to rate a brand on ‘quality’ and asking
them to express a degree of personal preference for it, but this represents a shift from the
respondent’s perception of the brand to one about their relationship with the brand.

Ultimately, the bottom – line relevance of all the perceptual material described in the
preceding section is that it somehow translates into customer behaviour – it leads to them
buying the brand, staying with the brand, perhaps paying more for the brand.

Brand valuations will only even be credible if they are based on reliable forecasts, and
reliable forecasts must be informed with statistical valid historical data relationships. When
accompanied by sensitivity analysis they indicate the most likely parameters of a brand’s
performance. When forecasts are backed up with robust evidence, using for example,
econometrics modelling data or correlation analysis, valuations become a credible addition
to management decision-making.

In recognition of this, the use of market research tracking data to link ‘soft ‘ marketing
measures with ‘hard’ financial measures is one of the fastest growing areas of market


Marketing research tracking is an approach that monitors consumer perception of brands
via sample based surveys.

Internationally, there are three main sources of the ‘brand equity’ research:


i) custom design studies, offered by research supplier firms;
ii) Advertising agencies, many of which have invested in the development and

execution of ‘brand equity’ research;
iii) proprietary system, developed specifically for the purpose of measuring brand

equity, by suppliers with a particular commitment to this field of research.

Proprietary systems are represented by summaries of projects/valuation methods of the
developers of prominent valuation techniques, some of which include software:

BrandDynamics from Millward Brown
Brand Building from the NPD Group
Brand Equity Tracking from Tandemar

It should be noted that the following descriptions were obtained from the agency or
research firms concerned and are derived from their literature on the subject, including
analysis available on the respective web sites.


Y & R decided upon a knowledge acquisition strategy that would enable the firm and its
operating companies to provide clients with the best brand-leverage opportunities. As part
of the implementation of the strategy, the largest worldwide surveys of consumer brand
perceptions were undertaken in the Summer of 1993 and Spring of 1998.

The process of building brands, BAV demonstrates, is reflected through a progression of four
primary measures:

• Differentiation
• Relevance
• Esteem
• Knowledge

These measures are used in BAV to evaluate current brand performance, to identify core
issues for the brands, as well as to evaluate brand potential.

Brands can be evaluated by these individual measures. But more important, the
relationships between the pillars show the true picture of a brand’s health, its intrinsic
value, its muscular capacity to carry a premium price and its ability to fend off competitors.


The starting point for all brands is Differentiation. It defines the brand and distinguishes it
from all others. Differentiation is how brands are born.


As a brand matures, BAV finds that Differentiation often declines. It doesn’t have to
happen. Even after reaching maturity, with good management, a brand can perpetuate its
Differentiation. A low level of Differentiation is a clear warning that a brand is fading.


Differentiation is the only the first step in building a brand. The next step is Relevance. If a
brand isn’t relevant, or personally appropriate to consumers, it isn’t going to attract and
keep them – certainly not in any great numbers.

BAV shows that there is a distinct correlation between Relevance and market penetration.
Relevance drives franchise size.


A brand’s Relevance and Differentiation viewed in relationship represent Brand Strength,
which is a strong indicator of future performance.

Relevant Differentiation – remaining both relevant and differentiated – is the central
challenge of every brand. It is critical for all brands all over the world.


BAV’s third primary measure is Esteem – how much consumers like a brand, hold it in high
regard. In the progression of building a brand, it follows Differentiation and Relevance. It’s
the consumer’s response to a marketer’s brand – building activity.

Esteem is related to two factors: perceptions of quality and popularity. The proportions of
these factors differ by country and culture.

BAV tracks the ways in which brands gain Esteem, which helps us consider how to manage
consumer perceptions. Through BAV, one could identify opportunities for leveraging a
brand’s Esteem.


If a brand has established its Relevant Differentiation and consumers come to hold it in high
Esteem, Brand knowledge is the outcome and represents the successful culmination of
building a brand. Knowledge is not a consequence of media weight alone. Spending money
against a weak idea will not buy knowledge. It has to be achieved.


As Brand Strength was found between Relevance and Differentiation, Brand Stature is
discovered in the combination of Esteem and Knowledge.


Brand Stature indicates brand status and scope – the consumers’ response to brand. As
such, it reflects current brand performance and is a strong strategic indicator. For example,
Esteem rises before Knowledge for a growing brand. If the data shows the opposite
relationship, a problem has been identified.

The BAV points out the wisdom of looking at brands in the entire brand landscape, which
will lead us to consider new possibilities for the brand, rather than risking the dangers of a
narrow vision of the category. The overreaching truth here is that, properly managed brands
can exist eternally. And BAV gives us the diagnostic framework to help our clients build,
leverage and maintain the power of their brands.


BrandDynamics measures and explains a brand’s consumer equity – consumers’
predisposition towards a brand as distinct from other factors that contribute to the brand’s
financial equity (e.g. distribution strengths, production, efficiencies, patents etc.)

BrandDynamics provides both consumer equity measurement and the diagnostic
understanding to inform tactical and strategic decision-making. BrandDynamics is built on
over 20 years of continuous brand health tracking research and 8 months of R&D
investment. Key measures are validated against sales.

Launched in 1996, customized BrandDynamics studies have been completed over 1300
brands in 15 categories across 19 countries. In 1998 one single study looked at 8 – 10
brands in each of 50 categories in 7 countries around the world – providing a data base on
over 3500 brands by markets.


This is a research-based measure, built on 4 key components:

• The consumer’s predisposition toward the brand – their likelihood of purchasing that
brand next, share of requirements (for packaged goods)

• The size of the brand – big brands achieve more sales for any given level of
consideration (i.e. consumers’ consideration ‘underestimates’ actual purchasing of
big brands)

• The type of consumer – Are they more attitudinally disposed to brands, or do they
see the category as a commodity where price is the key issue?

• The brand’s relative price (i.e. consumers’ consideration ‘overestimates’ actual
purchasing of expensive brands)

These four factors can be combined together in a mode to predict the likelihood of each
consumer buying the brand – a respondent level prediction of brand loyalty. Then category
expenditure data is added to provide consumer value – which is strongly correlated with
value market share.


For categories where sales data are unreliable or unobtainable, Consumer Value is of
significance in its own right as a valid indicator of sales. Some clients place more faith in
consumer value than market share which can be distorted by promotions.

The importance of having a validated, respondent – based measure is to explain why some
consumers are more valuable than others. This is done via five equity building blocks which
form a Brand Pyramid. Consumers at each level of the Brand Pyramid can be targeted via
advertising and other marketing activity. BrandDynamics provides specific and practical
diagnostics – driven marketing guidance.


The first step is to stimulate active knowledge of the brand – Presence. By active knowledge
we mean unaidedly aware, have tried brand, or an endorsement of the brand on key image
dimensions which show they have an understanding of what the brand promises.


To get to the next level the consumer has to feel that the brand could meet their needs –
and do so at an acceptable price for them. Relevance can be thought of as a hurdle that the
consumer has to pass over before a stronger relationship with the brand can be developed.


The brand does not have to be better than its competitors. But it does have to offer an
acceptable level of product delivery. If a brand has a genuinely superior product and
consumers are aware of this, then this will form a brand advantage.


Many brands may be acceptable, but for the brand to be more valuable to the consumer it
needs some form of ‘perceived advantage’. This can be a direct extension of some unique
aspect of the product delivery; however in many categories brands have little genuine
product differentiation. For these brands, softer aspects such as saliency, emotional appeal,
personality and popularity can provide the advantage.

11.9.5 BONDING

The more the consumer feels that the brand is the only one that offers key advantages
within their repertoire, the greater the bond between the consumer and the brand, and the
more loyal they are likely to be.

The pyramid is the starting point for the analysis of the brand’s strengths and weaknesses.
For example, we can see below that Brand A has a similar level of presence, relevance and
product acceptability as Brand B, but has higher advantage and much higher bonding.



Does position in the Pyramid matter? Certainly. As might be expected, Bonded consumers
typically generate a disproportionate share of the brand’s revenue. As shown below, Brand
A’s revenue comes primarily from Bonded and Advantage groups. The generic brand gains
much of its business from consumers who stumble across the brand in store and by it on
price – consumers for the generic has no Presence.


Future revenue is an important component of a brand’s equity; it demonstrates how a
brand’s market share is underpinned by the consumer’s predisposition toward certain
brands. While Consumer Value tells us about the worth of the brand now, it is not a
measure of market share robustness, i.e. brand strength. However, a brand’s conversion
profile does provide a measure of its relative strengths and weaknesses.

Based on the results from the initial BrandDynamics studies, three main types of pyramid
profiles were observed. These are shown below. The profile on the left shows the brand to
have relatively high Presence and Relevance, but relatively low advantage and bonding. In
contrast, the middle profile shows the brand to be low at presence and relevance – but once
past these hurdles to have a relatively high conversion to Performance, Advantage and
Bonding. The third profile is one where the brand is positive all the way up the pyramid
(with the possible exception of Relevance) – particularly at Performance, Advantage and

11.9.8 SUMMARY

BrandDynamics provides both a validated measurement of consumer equity and the
diagnostic understanding to inform tactical and strategic decision-making. And, it does this
in a way that is readily accessible to senior marketing professionals.



BrandBuilder was created in 1992 in order to address a variety of questions of strategic
importance to brand marketers: What’s happening in my category? Why is it happening?
How to create and maintain the consumer loyalty to my brands necessary to grow them,
extend them, shield them from competitive threat, thus making them – and keeping them-
profitable? At the heard of every successful brand is a core franchise of loyal buyers for
whom the brand satisfies high proportion of their needs. These behaviourally loyal buyers
often account for a disproportionate amount of the brand’s share and profits, as they seek
out the brand – and purchase it repeatedly – even in the face of competitive pressure.


Not all repeat buyers are equally committed to the brand. Some hold beliefs about the
brand that are consistent with their loyal purchase behaviour; they are the brand’s “core”


franchise. Core consumers are truly committed – behaviourally and attitudinally – to the

Others hold attitudes that are out of synch with their observed behavioural loyalty to the
brand. We call those with attitudes less positive than their purchasing behaviour
“vulnerable”, because their repeat purchasing is tied too strongly to price, or the attitudes
that drive their behaviour are important to few category buyers, making the brand
vulnerable to competitive offerings. Conversely, growing/strong brands typically “own”
critical attributes among consumers that are not yet buyers. These “prospects” often
become loyal buyers to the brand over time.

The essence of BrandBuilder, then to identify and size these buyer groups via a unique
modelling process that fuses survey date with behavioural data, and to identify the specific
dynamics and attributes that drive brand loyal behaviour.


It is not sufficient to merely determine which brands are strong, and which are weak. In
order to provide information to help brand marketers shift their brands’ positioning in the
proper direction, it is vitally important to ascertain the specific attributes that drive
behaviour at three levels:

(1) At the category level,
(2) At the segment/form/usage occasion, demographic group level, and
(3) At the brand level.

On the other hand, it is generally unnecessary, and may even be inaccurate; to ask
consumers to rate the importance of attributes themselves. It is far better to derive the
importance of attributes indirectly, through the measurement of behavioural loyalty on the
one hand, and consumer’s associations of specific characteristics of attributes with brands
on the other. The BrandBuilder model uses a logic regression procedure to determine the
key drivers of behaviour at each of these three levels.


The attitudes measured must be tailored to the category, and must include all key

• The larger the brand, the more likely it will be that the category drivers and the
brand drivers are the same,

• A brand that “owns” unimportant attributes can be described as a “niche” brand.
• A “niche” brand can also be a “strong” brand, provided that the base of consumers

“driven” by its attributes is growing, or if its share of that niche grows over time.



In order to arrive at a complete view of the client’s proper strategy, it is also critical to

determine the extent to which the category itself is strong or weak. The BrandBuilder

defines category equity as follows:


The tendency of buyers in the category to buy based purely on brand:

• Preferences (“Brand Driven”) on price along (“Price Driven”), or to
• Expect to be able to buy their favourite brand, and still get an attractive Price

(“System Beaters”).


Consumers are driven by Brand preferences in some categories, and price in others; very
few are Brand Driven, or Price Driven, across categories.

Historical patterns of marketing spending (e.g. high advertising spend), product quality
differentiation, and strong brand imagery, can all move a category into the “high equity”

Conversely, high levels of promotion spending, or erosions in product
quality/perceptions/differentiation, are likely to move categories into the System Beaters
quadrant, or into the Price quadrant.

It is easier to leverage a brand into a related category, than to category than to category
distant to it; if the target category has a similar pattern to the base category, consumer
expectations in the 2 categories will assist the brand transfer.

Despite the category’s pattern, an individual brand’s buyers may act differently; a brand
may be Brand Driven in a Price category or Price Driven in a Brand Driven category.


In order to validate the predictive relationship between attitudes and behaviour, an R & D
study was conducted. It is discussed in detail in a series of Journal of Advertising Research
articles (Baldinger and Rubinson, 1996, 1997). It was bound, in this work, that strong brands
tend to increase in market share from one year to the next, while weak brands tend to
decline in share.

In summary, BrandBuilder addresses the key branding questions:

• How many loyal buyers exist, at the category, segment and brand level?
• What are the key attitudinal drivers, in the category segment and brand?
• Which brands are strong, and which are weak, based on their patterns of behaviour

and attitude? and


• What changes should be made in brand positioning, the product itself, or marketing
support, to improve the health of the brand?


Tandemar launched its Brand Equity Tracking program, with a focus on brand health
measurement, based on extensive exploratory research and validation work.

Tidemark’s Brand Equity Tracking program provides both attitudinal and loyalty measures to
quantify a brand equity score, and is supported by a strong set of diagnostic measures to tell
you what communication strategies will work or will not work to strengthen the equity of
the brand.

Tandemar has conducted Equity Reviews in over 50 different sectors in Canada, and has an
extensive database of Canadian norms and case studies to draw on for analysis purposes.

Tidemark’s Brand Equity model is an evaluative framework which provides a way of
assessing the overall strength of consumer attitudes towards a brand. It is quantifiable,
measurable, and consistent form category to category. Canadian norms are available, based
on hundreds of case studies.

The parameters of the model are based on the learning from several international studies
(including market mix modelling), and have been supported by our own large scale study of
Canadian brands. Uniqueness and relevance are key brand delivery components, while
familiarity and knowledge are rooted in the salience of the brand to consumers. The
interactions of these dimensions indicate brand strength of ‘health’ brand opportunities and
brand vulnerability. These dimensions have been proved to correlate with purchase loyalty
in a variety of international studies, and have been validated by Tandemar in a large-scale
quantitative study in Canada.


There are many different proprietary approaches and systems for measuring ‘brand
strength’ and ‘brand equity’. In this material, certain key resources have been highlighted,
but there are numerous other, less well known approaches. Their validity is to a great
extent dependent upon the nature, complexity and structure of the market, whether it is a
Consumer or Business to Business market and whether the product or service is a frequent
or an infrequent purchase.

In ‘fast moving consumer goods’ markets consumers tend to have a repertoire of brands,
which are often almost interchangeable, and the ‘share of requirements ‘for a particular
brand may vary for a whole range of relatively unpredictable reasons. By contrast, in many
financial or ‘durable goods’ markets purchase frequency is very low and inertia is a massive
influence on sales.

With many of these studies the number of respondents limits segmentation of the sample
results while timing of the research can affect the validity of the conclusions.


Therefore, there is no one brand equity tracking model which is a ‘world beater’ in all
categories. Before approaching the consultant involved, the client should consider a
number of factors.

Why the final information is required

• The level of details of the information required
• The timescale in which the information is required
• Whether static or rolling data is required
• The amount that they are prepared to spend on the report
• The level of reliance they are prepared to place on the results

The key to success of the models described is arguably to marry simplicity and user-friendly
with a detailed and intensive information gathering engine. Category segmentation is a key.
The ideal model inevitably analyses a brand’s strength by segment i.e. by geography, by
lifestyle, by personality or by organizational associations.


David Aaker advocates a flexible approach to brand equity evaluation which he calls the
Brand Equity Ten.

He identifies what he believes to be the ten key aspects of brand performance which
illustrate the components of brand strength. He recommends that brands should be scored
against the following template.


1. Price Premium

Measuring the additional price that consumers are prepared to pay for a brand. For
example, a structured questionnaire may be used to establish the relationship between cost
and stated consumer preference for a number of similar goods. Or empirical evidence may
be available to demonstrate from historical data the actual relationship.

2. Satisfaction/Loyalty

Researching the customer’s level of satisfaction with a brand and the level of price
sensitivity allows the market to be segmented into ‘loyal users, price chasers and those in

Perceived Quality/Leadership Measures

3. Perceived Quality


Statistical models can be used to correlate perceived quality and financial measures such as
returns on investment and stock return. The changes in perceived quality scores can be
measured across a variety of different sectors, allowing a comparison of relative brand

4. Leadership / Popularity

Leadership scales attempt to measure whether the brand is “a category leader, is growing
more popular or is respected for innovation”.

Associations / Differentiation Measures

5. Perceived Value

This measures whether a brand represents value for money and whether consumers have a
reason to choose one brand over its competitors. In the latter sense it is a similar measure
to perceived quality.

6. Brand Personality

This is a particularly important factor where there are apparently only minor functional
differences between different t brands in a market. Brand personality “says something’
about the consumers of different brands. The soft drinks market is an example of this.
There may be little discernible difference in taste between Pepsi and Coca Cola, so the
marketing functions in each company concentrate their efforts upon differentiating the
products through image.

7. Organizational Associations

Brand strength often goes beyond the product brand to the corporate brand which
underlies it. For example, companies might seek to gauge how consumers react over time
to statements such as:

• This brand is made by an organization I would trust.
• I admire the brand X organization
• I would be proud (or pleased) to do business with the brand X.

Awareness Measures

8. Brand Awareness

A simple measure of the distinctiveness of a brand’s personality and the effectiveness of its
advertising and communication campaigns. Loyalty and purchase build from this platform.
Performance relative to competitor brands is a key indicator of brand health.

Market Behaviour Measures


9. Market Share

Measuring a brand via market share can be a clear indicator of consumers’ perceptions and
satisfaction with that brand. A falling market share is usually a good indicator that the
brand is slipping in the consumers’ estimations, although distinctions clearly need to be
made between volume and value share.

10. Market Price and Distribution Coverage

Brand strength can be measured by distribution percentage. Unlike market share these
measures are easier to define and are less subject to short term blips that may be caused by
price promotions. Measures like the percentage of shops stocking the brand, and the
brands accessibility to the percentage of consumers, are often used to judge a brand’s

Aaker’s recommended approach to brand equity evaluation, outlined in more details in his
book ‘Building Strong Brands’ (Free Press Business, First Edition, 1996), focuses principally
on consumer-oriented measures of brand strength12, although it also looks at market
oriented measures.


Brand Finance in 2009 came out with its Top 500 Global Brands listings. The top ten brands
• Wal-Mart
• Coca Cola
• Microsoft
• Google
• GE
• Vodafone
• HP
• Toyota



A discounted cash flow (DCF) technique, to discount estimated future royalties, at an
appropriate discount rate, to arrive, at a net present value (NPV) of the trademark, and
associated intellectual property: the brand value.



• To obtain brand-specific financial and revenue data
• To Model the market to identify market demand and the position of individual

brands in the context of all other market competitors


1. Estimated financial results for 2008 using Institutional Brokers Estimate System
(IBES) consensus forecast

2. A five-year forecast period (2009-2013), based on three data sources (IBES, historic
growth and GDP growth)

3. Perpetuity growth, based on a combination of growth expectations (GDP and IBES)

To establish the royalty rate for each brand, which was done by:

1. Calculating the brand strength – on a scale of 0 to 100, according to a number of
attributes such as brand presence, emotional connection, market share and
profitability, among others

2. To use brand strength to determine ßrandßeta1 Index score
3. Apply ßrandßeta Index score to the royalty rate range to determine the royalty rate

for the brand
4. Calculate future royalty income stream
5. Calculate the discount rate specific to each brand, taking account of its size,

geographical presence, reputation, gearing and brand rating (see across)
6. Discount future royalty stream (explicit forecast and perpetuity periods) to a net

present value – i.e.: the brand value


BrandFinance uses a ‘relief from royalty’ methodology that determines the value of the
brand in relation to the royalty rate that would be payable for its use were it owned by a
third party. The royalty rate is applied to future revenue to determine an earnings stream
that is attributable to the brand. The brand earnings stream is then discounted back to a net
present value.

The relief from royalty approach is used for two reasons: it is favoured by tax authorities
and the courts because it calculates brand values by reference to documented third-party
transactions; and it can be done based on publicly available financial information.


These are calculated using Brand Finance’s ßrandßeta analysis, which benchmarks the
strength, risk and future potential of a brand relative to its competitors on a scale ranging
from AAA to D. It is conceptually similar to a credit rating.


The data used to calculate the ratings comes from various sources including Bloomberg,
annual reports and Brand Finance research.

11.12.6 WAL-MART

Brand Value (US$M): US$40,616
Brand Rating: AA
Rank 08: 4th
Domicile: US

Wal-Mart Stores Inc. is the world’s largest public corporation by revenue according to the
Fortune Global 500 ranking. During 2008 Wal-Mart finally emerged from decades of living
under a cloud of public opinion in the US.

The recession has fuelled rising demand both in the US and in the UK via its price leading
ASDA subsidiary. Revenues, profits, market cap and brand value have all marched ever
upwards. At the moment Wal-Mart owns a 20% share of the entire retail grocery and
consumables business in the US.

Wal-Mart stands at the polar opposite of the corporate spectrum from banking.

While its market capitalization has fallen 17% since the crash in September 2008, it is still
higher than it was in September 2007. It seems that in the current climate, many will forgive
the working conditions and low wages forced upon Wal-Mart’s staff; Wal-Mart is still
providing jobs and feeding America.


Twenty20 has taken the cricketing world by storm since its inception in 2003. It has quickly
become a permanent part of both the domestic and international cricket calendars and has
reignited and attracted wider interest in this most gentrified of sports. The BCCI’s
introduction of the Indian Premier League with its $1 billion television deal and player
auctions has generated a level of hype and razzmatazz never seen before in the game of
cricket that is akin to established football, basketball and baseball franchises. Intangible
Business, and MTI Consulting, carried out an in-depth analysis into the values of these new
brands created by IPL


Heritage: largely irrelevant this year, but in future years, new teams will be added to the IPL
Popularity: consumer interest and behaviour; registered members, website visits,
attendances and TV viewing figures
International salience: a measure of each team’s relevance to an international audience
India salience: a measure of each teams relevance in its core market


Loyalty: demonstrates the ability of each brand to develop and sustain a lasting relationship
with supporters
Price premium: the strength and appeal of the brand allows premium pricing
IPL record: success on the field of play facilitates the acquisition of new fans and retention
of the existing fan base. PANEL MEASURES

Owner equity: a measure of the impact the franchise owner(s) have on the brand
Awareness: a measure of how well-known each brand is.
Perception: reflection of the franchise image in the eyes of consumers. METHODOLOGY

Brand values are a reflection of a brand’s ability to generate future income. It is a forward
looking study that uses historic performance and future trends to predict future activity.
Intangible Business & MTI gathered the publicly available sales data of 2008 for each
franchise. To determine the strength of the brands, each brand was scored on a series
attributes that underpin the power and reach of the each brand. These attributes were a
mixture of hard measures and soft measures of brand strength sourced from publicly
available information and from a qualitative panel of cricket fans from each test playing
nation. Using this data, each brand was then valued using the relief-from-royalty

The actual brand valuation calculation is relatively straight forward. It attempts to derive the
amount the brand owner would be willing to pay for its brand if it did not already own it.
This approach is called the relief from royalty methodology as it calculates how much the
brand owner is relieved from paying by virtue of owning the brand. The more complicated
parts are the components that contribute to the calculation. These three stages illustrate
the process:


IB & MTI gathered last years (2008) “historical sales” data for each franchise brand. Despite
their relatively short existence it was assumed that the brands have indefinite lives such as
the more established sport franchises like the English Premier League (11 of the 12 original
members of The Football League formed in 1888 are still running.) The compound annual
growth rate (CAGR) was adjusted to reflect the brand’s long term ability for growth. This
reflects more accurately a brand’s growth prospects based on its current and historical



To determine the strength of the brands, each brand was scored on three measures of
brand strength, provided from qualitative panel data –owner equity, awareness and
perception. Each brand was also measured on hard data including heritage, popularity,
salience, loyalty, price premium and IPL record. The average of these two total scores (panel
brand score and hard brand score) was then positioned between a royalty rate range. This
determined a unique royalty rate for each brand. The royalty rate appears to be a simple
percentage but in fact this hides the depth of understanding required to determine a rate
that reflects accurately the profit/cash flow generated by the brand alone –separate from
other elements of product delivery.


Future sales were then multiplied by the royalty rate and reduced at the relevant tax rate.
They were then discounted to calculate the net present value of those future cash flows.
The discount rate reflects the time value and risk attached to those cash flows and for the
purpose of this exercise a 14% discount rate had been applied.


Results were tested and verified by sense-checks, such as to comparable commercial
transactions, and referenced to proprietary information on the value of leading brands,
which all share similar characteristics of value cash flow generation. These valuations were
based on an analysis of publicly available information and can’t be considered as necessarily
reflecting true past or future performance.


The valuation was carried out by assuming that the TWENTY20 format was here to stay.
Although according to IB & MTI “it’s only a matter of time before politics and self-interest
attempts to upset the apple cart. In the medium-long term, it’s almost certain that either
individually or collaboratively the other boards will attempt to launch rival competitions that
may either dilute the IPL or replace it as the premier domestic Twenty20 competition, but
given the IPL’s successful start, the size of the Indian market and the passionate Indian
cricket fans, rival competitions face a near impossible challenge and national boards would
be better off supporting the IPL.”


To be considered alongside global brands like Manchester United and LA Lakers. IB & MTI
suggested the following factors as key building blocks towards developing a sustainable
global sports brand:






In 1988 GrandMet was the first U.K. Company to begin the practice of accessing the value of
recently acquired Brands (Smirnoff, Baileys, Haagen-Dazs, Green Giant and Burger King) &
then capitalizing the value on the balance sheet.

Only acquired brands were included on the balance sheet despite the obvious value to
GrandMet of its internally generated brands. These “Intangible Assets” constituted 27 % of
the company’s assets.

Early valuations were based on historical earnings multiples, a method not currently seen
as accurately reflecting the true worth of a brand.

GrandMet also introduced “brand equity monitor”. The purpose of this was not to place a
historical value on a brand, but to give management an idea of the performance of brands.
The factors measured could not be measured in purely profit and loss terms and the
monitor included both economic, consumer and perceptual measures of performance,
which together formed a subtle and responsive mechanism for tracking both brand health,
and if necessary financial brand value.

Diageo now monitors a number of key financial and marketing drivers to establish the level
of brand equity. These drivers focus management’s attention on gaining customer
awareness, loyalty, market share and the brand’s ability to charge a price premium. It is this
premium which communicates the value of a brand to the company’s stakeholders.
There are a number of checks used by Diageo staff to assess the trends in brand equity. A
sample of these measures includes awareness, advertising spend, market penetration and
share of display.

Management is able to gauge the relative health of brands from a flow of consistent and
reliable data. The fact that the vast majority of this data will never be included in the
company accounts is irrelevant; it provides instead a degree of strategic and operational
control over the group’s most valuable assets

The catalyst for these developments was the need to adequately reflect, from solely a
financial reporting perspective, the value of brands.


11.15 GODREJ

Godrej Consumer Product Limited’s valuation by Brand Finance done in the year 2007. The
GCPL underwent a Brand Valuation for 5 of its products through Brand Finance, a UK based
world renowned firm in marketing and valuation expertise.

Brand Finance valued 5 major brands of GCPL:

• Cinthol
• Fairglow
• Godrej No.1
• Ezee
• Godrej PHD

The objective was to know the value of the brands & identification of demand drivers for
each brand, quantifying the potential branded business value uplift by leveraging brand
equity. Brand Finance in general, employs these methods for its valuation purposes:

• Cost Based Valuation
• Income Based Valuation: Royalty Prices
• Income Based Valuation: Economic Use
• Market Based Valuation



This is the first time the values of the world’s largest mobile telecoms brands have been
published. The brands of those in the top 100 are collectively worth over $300bn. This is a
heavily branded industry. With mobile services frequently generic – with little to choose
from between competitors – brands are generally the main differentiator. They can inspire
loyalty, help reduce customer churn, increase average revenues per user (ARPU), attract
new customers and encourage existing ones to trial new services and related products.

The World’s Most Valuable Mobile Telecoms Brands 2008 identifies which brands are
succeeding in building value for their shareholders and which brands require additional
resource and attention. 500 of the world’s biggest operators were studied to produce the
top 100. The telecoms industry is highly competitive and acquisitions are common.

2009 will be a testing year for all. The economic instability and uncertainty should drive
investors to seek defensive havens in businesses with safe, strong, valuable brands. This
publication highlights the most valuable brands and those with the biggest opportunities,
both in developed and emerging markets.


Intangible Business would like to thank the people and organizations which have
contributed to the production of this report and research. Special thanks goes to Informa
Telecoms & Media, Mobile Telecommunications International and representatives from MTI


Brand values are a reflection of a brand’s ability to generate future income. It is a forward
looking study that uses historic performance and future trends to predict future value.
Three years of publicly available historical sales data was gathered for 500 of the world’s
biggest telecoms brands. To determine the strength of the brands, each brand was also
scored on nine hard measures, sourced from Informa Telecoms & Media, and nine measures
of brand strength from a panel of industry experts. Using this data, each brand was then
valued using the relief-from-royalty methodology to produce the top 100.


Turnover: volume of branded mobile income
Subscriptions: number of active subscribers attached to each brand
Customer churn: proportion of customers leaving the brand annually
Market share: average market share in each main market of mobile telecoms users
Penetration: proportion of the market which has telecoms services
CAPEX: volume of capital expenditure invested in future benefits
EBITDA: earnings before interest, taxes, depreciation and amortization
ARPU: average revenue per user
Profitability: level of relative profitability of each brand


Share of market: measure of market share
Brand growth: projected growth based on 3-5 years historical data and future trends
Price positioning: a measure of a brand’s ability to command a premium
Market scope: number of markets in which the brand has a significant presence
Brand preference: a measure of relative pre-disposition or spontaneous selection of a brand
Brand awareness: a combination of prompted and spontaneous awareness
Brand relevancy: capacity to relate to the brand and a propensity to purchase
Brand heritage: a brand’s longevity and a measure of how it is embedded in local culture
Brand perception: loyalty and how close a strong brand image is to a desire for ownership


Brand values are a reflection of a brand’s ability to generate future income. So this is a
forward looking study that uses historic performance and future trends to predict future
activity. The actual brand valuation calculation is relatively straight forward. It attempts to
derive the amount the brand owner would be willing to pay for its brand if it did not already
own it. This approach is called the relief from royalty methodology as it calculates how much
the brand owner is relieved from paying by virtue of owning the brand. The more


complicated parts are the components that contribute to the calculation. These three stages
illustrate the process, simply:

1. Forecast sales: Three years of historical sales data was gathered for 500 of the world’s
biggest mobile operator brands. The top 100 brands have been given indefinite lives as they
are all market leaders, with heritage and financially robust owners. The compound annual
growth rate (CAGR) is adjusted to reflect the brand’s long term ability for growth. This
reflects more accurately a brand’s growth prospects based on its current and historical

2. Royalty rate: To determine the strength of the brands, each brand was scored on nine
measures of brand strength, provided from qualitative panel data. This included share of
market, growth, price positioning, market scope, preference, awareness, relevance, heritage
and perception.

Each brand was also measured on three years of hard data including turnover, subscriptions,
churn, market share, growth, penetration, average revenue per user (ARPU), and
profitability. The average of these two total scores (panel brand score and hard brand score)
was then positioned between a royalty rate range. This determines a unique royalty rate for
each brand.

The royalty rate appears to be a simple percentage but in fact this hides the depth of
understanding required to determine a rate that reflects accurately the profit/cash flow
generated by the brand alone – separate from other elements of product delivery.

3. Discount rate: Future sales are then multiplied by the royalty rate and reduced at the
relevant tax rate. They are then multiplied by a discount rate to calculate the net present
value of those future cash flows. The discount rate reflects the time value and risk attached
to those cash flows and for the purpose of this exercise has been left at a flat 9% as these
are relatively low-risk, established brands.

11.16.6 KEY ISSUES:

1. Economy: Telecoms firms are traditionally resilient to economic woes. However, few
industries look likely to be immune from the negative impact of the current financial crisis
which is truly global. The telecoms industry will be no exception. Brands will suffer but with
this comes opportunity for strong brands to steal market share from the weaker. Hatches
need battening down, focus needs sharpening and all brands will need to understand what
drives their value.

2. Brand Portfolios: Following acquisitions the dilemma always exists of whether to keep
the brand or transition another brand in its place. Different operators take different
approaches. In Hungary for instance, Tenor owns and operates the Pennon brand using the
Teleport blue logo whereas in other countries the Teleport name is used with the same
logo. Telephonic uses its own brand as well as others including Moister and O2. America
Moil also has the Claro and Telco brands. Would it be better for these companies to merge
their portfolio of brands into one dominant brand? Local brands can have substantial


traction which, if dislodged, would be extremely detrimental. Generally, however,
transitioning these brands into one dominant brand in a sensitive fashion would increase
the value of the whole.

3. Emerging Markets: Africa, China, India and Latin America present the biggest
opportunities for mobile operators with the sheer size of the populations and economic
growth prospects. These markets have experienced significant growth in recent years
attracting considerable interest from international, acquisitive groups. As growth stagnates
in more developed markets of Europe and the US the attraction in emerging markets will
only increase.

4. Consolidation: Further consolidation is inevitable with synergies from merging
operations, the desire for cross-border brands and financial instability making more deals
look attractive. Customers are generally the main motivation for acquisitions in the
telecoms industry. However, as customer relationships are generally with the brand,
particular attention needs to be given to brand due diligence prior to the acquisition.


1. $30.8bn China Mobile

With 400m subscribers and 20% annual revenue growth driving income to near $50bn in
2007, China Mobile is the world’s biggest mobile telecoms operator. It also has the world’s
most valuable telecoms brand, worth $30.8bn. The China Mobile brand was also scored the
highest by the panel of industry experts and has the strongest overall brand score. Since
losing its monopoly China Mobile has continued to be the dominant operator, a status it is
set to continue enjoying.

2. $22.1bn Vodafone

Britain’s Vodafone group is the world’s second biggest mobile operator by both revenue and
subscribers. Its brand is the most geographically spread and is the second most valuable
telecoms brand in the world & the first-most valuable brand in EU, worth $22.1bn. Its
marketing investments, distinctive speech mark logo and vivid red colouring aid the brand’s
standout and the company’s consistently acquisitive and nimble management will ensure
brand value continues to grow with the company.

3. $20.4bn Verizon Wireless

As the biggest mobile operator in the US with revenues of $43bn, Verizon enjoys a customer
base of over 70m. The brand’s significant advertising spend and 2,600 stores and kiosks
throughout the country ensure Verizon’s constant and consistent visibility. Verizon’s
relatively high ARPU and positive associations with the brand will contribute towards
maintaining and developing the brand’s equity.



The value of the brand Infosys shot up 62 per cent to Rs 22,915 crore in fiscal 2006 against
Rs 14,153 crore in fiscal 2005.

Similarly, the market capitalization of country's second largest software exporter grew by 35
per cent to Rs 82,154 crore during the year from Rs. 61,073 crore, the company said in its
annual report for 2005-06. The value of the Infosys brand was at 27.9 per cent of its market
cap during fiscal 2006 against 23.2 per cent in 2005.


Infosys had adopted the generic brand earnings-multiple model to value its corporate
brand, the company said. The concept finds mention in "Valuation of Trademarks and Brand
Names" by Mr. Michael Birkin in "Brand Valuation", edited by Mr. John Murphy.

Using the brand earnings-multiple model, Infosys based its valuation on the following
assumptions, among others the total revenues excluding other income after adjusting the
cost of earnings, the annual inflation at five per cent and five per cent of the average capital
employed used for purposes other than promotion of the brand and a tax rate of 33.66 per

Infosys annual report said it had used various models for evaluating assets off the balance
sheet to bring certain advances in financial reporting. "Such an exercise also helps the
Infosys management in understanding the components that make up goodwill. The aim of
such modelling is to lead a debate on the balance sheet of the next millennium,'' it added.


Goodwill is a nebulous accounting concept that is defined as the premium paid to tangible
assets of a company. It is an umbrella concept that transcends components such as brand
equity and human resources.

Corporate attributes including core competency, market leadership, copyrights, trademarks,
brands, superior earning power, excellence in management, outstanding workforce,
competition, longevity were built into this concept, the annual report said.

Infosys believes the client base was its most valuable intangible asset. Marquee clients or
image enhancing clients accounted for 48 per cent of Infosys' total revenues.


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