Valuing brands is important for business interactions, financial reporting, and raising capital. There are various methods, including revenue, market, and cost approaches, but consistency and disclosure are crucial. Professional third-party assessments are often sought but not always necessary.
Brand valuation is the process by which brands or intangible assets are valued, often in a monetary manner. Evaluating trademarks can be essential to many business interactions, including sales and mergers, licensing clauses, and bankruptcy filings. Knowing the value and, equally important, the change in value of a brand can also help with financial reporting.
A brand creates value by inspiring loyalty, influencing purchases, and increasing the ability to charge higher prices. In addition to creating market value, brands can be monetized to raise capital through licenses or warranties. A brand can be a name, brand or logo. Valuing brands is therefore important when assessing market value, image and financial position.
Like any intellectual or non-monetary asset, brands are difficult to value because there are many ways to calculate that value. For example, brands are not independent and their value depends directly on other assets, including the product or service offered by the organization. While it would therefore be helpful to have a universal way to complete the brand assessment, the methods can be industry and even business specific.
Evaluation methods are chosen by first assessing the purpose of the evaluation; calculations for financial reporting or transactions may be different from those used for litigation or bankruptcy, for example. Many of these valuation techniques begin with a historical overview and profile of the organization and its brand. A historical understanding of the business and brand can help the rating source choose the most appropriate approach to rating. The methodologies then take into account the description, resource usage and related audience when completing an initial background.
One method of attributing value to brands is through the revenue approach. In this approach, discounted cash flows or capitalization of earnings methods are often used to estimate the value of anticipated future earnings due to the brand. This calculation takes the net present value of future earnings.
A market approach to evaluating brands compares the prices of similar brands in the market. However, the characteristics used to compare brands across organizations vary. Once comparable brands have been chosen, analysis of royalty rates and transaction pricing is used to determine market prices for similar businesses.
The cost approach to brand valuation attempts to value brands by calculating the cost of recreating them. Cost calculation, however, does not necessarily take into account value added or loss, making it a particular methodology. A cost calculation can include the historical present value costs of building the brand.
There are many different approaches to valuing intangible assets, and brand valuation is just one example. Whatever method is used, consistency, understanding and full disclosure are important. As a result, many companies seek out a professionally recognized third-party assessment, although this is not always necessary.
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