- Brand valuation is most beneficial when strategising, not when faced with change
- Report should initiate conversation, rather than focus on dollar-amount or ranking
- Supplemental reporting would bridge the gap between traditional financial reporting
The traditional lines between industries have blurred. Take Amazon for example. The e-commerce behemoth is a tech company, a retail company and a services company all in one. Apple too went from computing to consumer electronics to a company recognised by consumers around the world for its stores and services. Cross-over business models are the way forward. And their success relies on proprietary assets. But how do you value these?
“Valuation is the analytical toolkit to help people take that measurement,” explains Brian Buss, IP valuation expert at Nevium. Yet most companies have fewer resources than they would like. For start-ups and SMEs in particular, IP valuation may seem like an unnecessary expense.
The opposite is true. “Without a good understanding of which of your company’s proprietary assets are making the largest contribution to sales, profits and cashflows, you might not be allocating your resources as efficiently as you can and you’re missing opportunities to invest in the right assets and generate more resources,” Buss warns. The IP valuation process determines which assets are most valuable to the business, therefore helping company owners to allocate resources more efficiently.
What does valuation involve?
The first step is to figure out what the brand assets are. These could be trademarks, websites, social media accounts – the list goes on. Valuation analysts review company documents and ideally liaise with management to put together an inventory of assets that the business owns – and does not own – irrespective of whether they appear on the balance sheet.
Due diligence is vital here. Small, family-run businesses in particular may not have clear legal ownership of the assets that they think they do. Bigger companies, meanwhile, may not have thought to protect practices and procedures that are in fact vital to their success. “There may be a presumption that the company has a clear legal right to those assets, but it may be more muddled that they actually think,” Buss warns.
Once the brand bundle has been defined, the second step is to figure out what portion of revenue, profits and cashflows is derived from its ownership. This cannot be assessed in a silo. “The challenge for valuing brand assets is that you can’t just focus on brand and ignore all the other proprietary assets of the company,” Buss states. For example, it takes technology and brand assets working together for an online business to be successful. Attempting to measure the impact of one without the other would be futile.
Two valuation approaches can be taken:
- an internally focused method, which measures the portion of revenues and cashflows derived from the brand assets and determines how those assets contribute to the company’s performance; or
- an externally focused method, which assesses how much other companies have paid in royalties or compensation for similar or comparable assets, before using those arm’s length transactions as a benchmark to value the company’s own assets.
How do I know which method to choose?
The best approach depends on the company’s motives. Both methods are useful, but each has its limitations. The internal method focuses solely on how the company uses its own assets. Other companies in the same industry could use theirs differently. Therefore, the result could differ dramatically. The external method focuses on what people may pay for those assets but is less focused on how the assets currently benefit the business owner.
“Rather than saying that it should be this method or the other, it’s probably more important to utilise both and then reconcile the results to fill out the valuation opinion,” Buss admits.
Not all companies will have the means or motive to do this. The role of the valuation analyst is therefore vital when it comes to selecting a method. “One methodology is not better than the other. Each provides useful information and the valuation analyst needs to explain how that information is informative,” Buss says.
How do I know when the time is right?
Recurring IP valuations are not always necessary, Buss contends. Valuation is most beneficial when the business is in a resolute state – that is, when it is not facing a transaction or imminent change. “It’s the kind of thing that gives you a good reset and a good understanding of your business when it’s in a non-crisis state,” he explains. “You can then look forward, use the information from the valuation and understand what resources are most important to your business when the next crisis, call to action or big change rolls around.”
Companies that get the most from a brand valuation are those that are strategising on where to go next. You would not go into battle without checking what weapons you had in your arsenal. Nor would you want to be caught in a rainstorm without knowing where you packed your umbrella. IP valuation helps brand owners to prepare for what lies around the corner. The results can quickly become out-dated – or worse, inaccurate – if the valuation takes place at a time of upheaval.
The due diligence process also provides an opportunity to find and clear up red-flag issues. “It’s a good opportunity to prevent problems that could come up and derail you when you’re in a crisis state,” Buss notes.
What do we do with the information?
The valuation report or presentation needs to be transparent. “The conversation that follows from the valuation result is probably as important as the actual dollar amount of the results,” Buss muses. Analysts should have an opportunity to present the information and address questions from the company. “There’s value in analysts sharing the report, as opposed to just the results, or at least enabling large groups of stakeholders to participate in the process and question how the results were arrived at,” he urges. That way, the report gives business owners a reason to pick apart previous assumptions in order to clarify whether future financial goals are attainable.
This reporting process should be considered best practice. “You don’t want the valuation report to become a doorstop,” Buss states. “The purpose is not necessarily to get the dollar-amount result, but to give people a snapshot of where the company’s at, what makes it work at that point in time and the relative contribution of different assets… That snapshot helps to create conversations that lead to strategic decisions.”
How do I respond to sceptics?
There is a lot of scepticism around the various forms that brand valuation can take, particularly where valuation reports are less transparent. “As a profession, we haven’t quite figured out what the best practices should be,” Buss admits.
Best practice should be for brand valuations to be clear and open about how they arrived at their results (eg, the assets identified and why), he states. Standardisation should then focus on this best practice rather than codified methodologies.
“The emphasis should not necessarily be on codifying certain methodologies, because IP valuation is a relatively new profession, and who’s to say we won’t come up with more methodologies or approaches, or new ways to value intangible assets?” Buss says. “Industry best practice should be to share your work and use your work to create conversation, as opposed to focusing just on the numerical answer that results from the process.”
“When you see companies bounce around on brand valuation tables or rankings, it creates the impression that the results are too variable, too imprecise,” he continues. “The valuation profession should emphasise the discussion and communication benefits of our process, as opposed to the number that comes out as a result. I think it’s less informative and less helpful to say ‘here’s the top 10 most valuable brands in the world in numerical ranking’ than it is to emphasise the understanding that brands can contribute to a business’ success in multiple ways and it’s different for each company.”
“The tables do a good job of spreading the word about brands,” Buss grants. But this is only a conversation starter. “The rest of the conversation needs to be: ‘Now, if we understand our business better, if we undertake an IP valuation process, how will we learn more about ourselves so that we can be more effective, more efficient and more successful going forward?’” he says.
How do we disclose the results?
Public companies are limited as to how much they can reveal. And valuation is based on future projections, which are inherently uncertain. For these reasons, intangible assets such as brands are often omitted from the company balance sheet. “If you take the dollar amount from a valuation and stick that on your balance sheet, you’ve made a much more formal commitment,” Buss admits.
Supplemental reporting may be a better alternative. “A lot of companies provide CSR reports. Maybe the happy medium for brands and intellectual property is to have an internal propriety assets supplement or disclosure,” Buss suggests. “You’d keep the balance sheet as it is but provide supplemental information about the current state of internally generated assets such as proprietary technologies and brands.”
Supplemental reporting would use the asset identification and IP valuation process to disclose what the company has been working on and how this is likely to contribute to its future success, without making this an official part of its audited financial report. “It would bridge the gap between traditional financial reporting and the desire to know more about how modern companies create success,” Buss argues. This would provide valuable insight for company owners, stakeholders, investors, lenders and even employees.
An internal proprietary asset supplement would have to be a cross-function effort. Valuing IP assets requires input from legal and in-house counsel, as well as information from marketing, the product and R&D teams, and finance. “If done well, it would be a communication from all those different functions within the company to say how they’re working together to create assets that will drive the future success of the company,” Buss reflects.
For more on brand valuation, see WTR’s latest Special Report, “Managing the brand balance sheet“, available to subscribers via the link and in our Report Centre.
Victoria Arnold
Author | News Reporter
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TAGS
Brand management, International
