Brand valuation plays an important role in determining purchase prices as part of business valuation. After all, brands are intangible assets that have a significant impact on the value of a company. But how can the value of a brand be validly determined? And how challenging is brand valuation? This article provides answers for companies and investors.
Some types of internally generated intangible assets may be capitalized under IFRS. However, values arising from self-created brands may not be capitalized for several reasons:
However, there is one exception: if a brand is transferred as part of a company acquisition, the purchase price can be capitalized as an intangible asset.
A trademark is generally acquired either directly or indirectly. In the case of a direct acquisition, things are simple: the purchase price is included in the buyer's annual financial statements.
The situation is different for the indirect acquisition of brands. If a brand is transferred as part of a company takeover, only the total purchase price is known and the brand is not reported as an individual item.
In practice, this leads to the need for a purchase price allocation for the consolidated financial statements. The entire purchase price for the company is allocated to all acquired assets - including the acquired brands.
The brand is initially measured as part of the company acquisition. A revaluation can be carried out in subsequent years, but this is not mandatory under IFRS, as brands can theoretically exist forever and do not have a limited lifespan.
However, if there are indications of an impairment of the brand, for example due to declining market shares or negative reporting, a revaluation must be carried out in accordance with IAS 36.
Under IFRS, the useful life of a brand can be assumed to be indefinite. In this case, no scheduled amortization may be carried out. Instead, an impairment test must be carried out annually or in the event of events that suggest an impairment of the asset (triggering events) in order to examine the recoverability of the asset.
The carrying amount of the brand is compared with the recoverable amount. The recoverable amount corresponds to the higher value from a comparison: here the fair value less costs to sell on the basis of a sale at market conditions. There the subjective, DCF-based value in use. If the recoverable amount is lower than the carrying amount, the asset is written down to this value.
In purchase price allocation, the focus is on capital value-oriented methods for determining the brand value. This involves determining the future economic benefits accruing to the company, i.e. the contribution the brand makes to earnings.
The capital value-oriented methods include the relief-from-royalty method, the incremental cashflow method and the multi-period excess earnings method.
In the relief-from-royalty method method, the value of a trademark is determined by making a comparison with similar license fees paid for comparable assets on the market.
The incremental cash flow method determines the value of a brand by calculating the additional cash flow that can be directly attributed to the brand.
With the multi-period excess earnings method, the value of a brand is determined on the basis of the additional income it generates.
In order to determine the brand value using the relief-from-royalty method, various pieces of information are required:
In practice, the first step is to look for licenses that approximate the brand to be evaluated and consider criteria such as the industry, the geographical region, the type of brand and the duration of use.
An average or representative license rate is then determined from the identified licenses.
This is then discounted to the present day in order to determine the present value. This corresponds to the value of the brand.
If the brand value is determined using the incremental profit method, this information is required:
In practice, the additional income that can be attributed to the brand is determined. For example, a comparative analysis is first carried out and similar products on the market without a strong brand are considered.
A detailed profit and loss account is then prepared for both the company being valued (with brand) and the comparable company (without brand).
The difference between the profit of the comparable company and the company under review is the excess profit.
This is projected over a certain period of time and then discounted to the present day. The resulting present value corresponds to the value of the brand.
With the multi-period excess earnings method, the brand value is determined as a residual value after all costs and all assets used to generate cash flow have been taken into account.
This also requires capital costs, but the procedure is not quite as typical in brand valuation, as a brand rarely represents the so-called "main asset" for which this approach is usually used.
Databases can be used to determine the cost of capital and license rates. They are objective because they are based on real market data. They also save time-consuming research and make it possible to compare different companies and sectors.
Databases for the cost of capital can contain average values for various industries and risk profiles as well as company-specific data. The latter allow an individual calculation of the cost of capital.
License rate databases contain information on concluded license agreements - including the license rates, the term and the parties involved. There are also market databases that contain general market information on license fees in specific industries.
Brand valuation presents companies and investors with a number of challenges. While accounting restricts the capitalization of self-created brands, brand valuation is becoming increasingly important in the context of company takeovers and impairment tests.
Capital value-oriented methods such as the relief-from-royalty method and the incremental-cashflow-method offer suitable approaches for determining the brand value. The use of databases for costs of capital and license rates enables a more objective, efficient and ultimately more convenient valuation. The choice of the appropriate method depends on the availability of data and the specific characteristics of the brand.
We support you in researching the data — e.g. putting together the peer group — with a short training session on how to use the platform. We are happy to do this based on your specific project.
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