Brand Valuation

205 Pages·2016·1.399 MB·English

by  Luc Paugam, Paul André, Henri Philippe, Roula Harfouche

Brand Valuation
In the new economy where value drivers are shifting from tangible to intan-
gible resources, brands are the most familiar asset. They are well known
by consumers, perceived as a critical component of enterprise value, and
often motivate large mergers and acquisitions. Yet brands are a complex
intangible asset, and their valuation is a difficult task requiring a variety of
expertise: legal, economic, financial, sector-specific, and marketing.
Using rigorous methodologies, an analysis of the world of the new econ-
omy, and an inquiry into the limits of modern valuation technics, this book
offers empirical and theoretical background to the key issue of brand valu-
ation. It provides answers to the many questions that arise when attempting
to value a brand: How to understand the origin of brand value? How to
assess its value objectively? Why valuations of some brands by consulting
firms differ so widely? How to understand that some brands are valued at
millions of euros when the companies that own them are losing money?
Brand Valuation explains the economics and finance factors explain-
ing the value and volatility of brands and presents the most commonly
used methodologies to value brands, such as the cost methods, the excess
earnings approach, the relief-from-royalty method, or the excess revenue
approach. The methodologies covered are illustrated with numerous exam-
ples, allowing the reader to grasp the advantages and limits of each valua-
tion technique. The book presents the relevant context of brand valuation,
including the applicable existing accounting and valuation standards and
also discusses the models developed by consulting firms.
Luc Paugam is an Associate Professor at ESSEC Business School, France.
Paul André is a Professor at HEC Lausanne at the University of Lausanne,
Switzerland.
Henri Philippe is a Partner at Accuracy in Paris, a corporate finance consulting
firm, and teaches finance at the Université Paris-Dauphine, HEC Paris, and
École Nationale des Ponts et Chaussées, France.
Roula Harfouche is a Fellow of the Institute of Chartered Accountants in
England and Wales and a Partner at Accuracy London, UK.
Routledge Studies in Accounting
For a full list of titles in this series, please visit www.routledge.com
9 Law, Corporate Governance, and Accounting: European Perspectives
Edited by Victoria Krivogorsky
10 Management Accounting Research in Practice
Lessons Learned from an Interventionist Approach
Petri Suomala and Jouni Lyly-Yrjänäinen
11 Solvency in Financial Accounting
Julie Margret
12 Accounting and Order
Mahmoud Ezzamel
13 Accounting and Business Economics
Insights from National Traditions
Edited by Yuri Biondi and Stefano Zambon
14 The Nature of Accounting Regulation
Ian Dennis
15 International Classification of Financial Reporting, Third Edition
Chris Nobes
16 Fraud in Financial Statements
Julie E. Margret and
Geoffrey Peck
17 Auditing Theory
Ian Dennis
18 Brand Valuation
Luc Paugam, Paul André, Henri Philippe, and Roula Harfouche
Brand Valuation
Luc Paugam, Paul André,
Henri Philippe, and
Roula Harfouche
First published 2016
by Routledge
711 Third Avenue, New York, NY 10017
and by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2016 Taylor & Francis
The right of Luc Paugam, Paul André, Henri Philippe, and Roula Harfouche to
be identified as authors of this work has been asserted by them in accordance
with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in writing from the
publishers.
Trademark notice: Product or corporate names may be trademarks or registered
trademarks, and are used only for identification and explanation without intent
to infringe.
Library of Congress Cataloging-in-Publication Data
Names: Paugam, Luc, author.
Title: Brand valuation / by Luc Paugam, Paul Andrâe, Henri Philippe, and
Roula Harfouche.
Description: New York : Routledge, 2016. | Series: Routledge studies in
accounting ; 18 | Includes bibliographical references and index.
Identifiers: LCCN 2016000105 | ISBN 9781138933828 (hardback : alk. paper) |
ISBN 9781315677347 (ebook)
Subjects: LCSH: Brand name products—Valuation. | Intangible
property—Valuation. | Brand loyalty. | Branding (Marketing)
Classification: LCC HD69.B7 P39 2016 | DDC 657/.7—dc23
LC record available at http://lccn.loc.gov/2016000105
ISBN: 978-1-138-93382-8 (hbk)
ISBN: 978-1-315-67734-7 (ebk)
Typeset in Sabon
by Apex CoVantage, LLC
Contents
List of Tables and Figures vii
Acknowledgments xi
About the Authors xiii
Introduction xv
1 What Is a Brand? 1
2 Brand Value 27
3 Brands and Accounting Standards 40
4 The Excess Earnings Method 66
5 Revenue Premium Method 84
6 The Relief-From-Royalty Method 92
7 The Market-Based Approach 103
8 The Cost-Based Approach 111
9 Brands and Valuation Standards 120
10 Ad Hoc Valuation Models 136
11 Volatility of Brand Values 151
Conclusion 163
Appendix 1 167
Appendix 2 172
Appendix 3 174
Appendix 4 176
Index 179
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Tables and Figures
Tables
1.1 Details of fixed assets on the balance sheet of Barbara Bui
(2013–2014) 7
1.2 Top-ten S&P 500 firms by advertising expense in 2014 7
1.3 Advertising expenses by sector (Global Industry
Classification Standards)—S&P 500 companies from
2004 to 2014 8
1.4 Relationship between advertising expenditure, operational
performance, sales growth, and market return (for S&P 500
companies with positive advertising expenditure from 2004
to 2014) 9
1.5 Brand life cycle and probable life expectancy (LE) 16
1.6 Lifespans used in accounting valuations of brands in the
United States 17
2.1 Balance sheet of Fashion 22 at 31/12/20×4 30
2.2 Income statement of Fashion 22 for year 20×4 31
2.3 Cash flows generated by Fashion 22 for year 20×4 31
2.4 Income statement of Fashion 22 for year 20×4 with the
effects of the brand 33
2.5 Estimated cash flows of Fashion 22 and incremental brand-
related cash flows 34
3.1 Uncertainty as to the amounts of expected cash flows
generated by a brand in year n + 1 51
3.2 Uncertainty as to the timing of cash flows generated by a
brand in the years n + 1 to n + 3 52
3.3 Recognition of intangible assets by FTSE 100 companies 60
4.1 Historical income statements of Consultancy Inc. 72
4.2 Forecast income statement of Consultancy Inc. 72
4.3 Historical balance sheets of Consultancy Inc. 72
4.4 Forecast profitability and ROCE of Consultancy Inc. 73
4.5 Estimation of annual excess earnings 74
4.6 Estimated excess earnings of the Consultancy Inc. business 77
viii Tables and Figures
4.7 Value of Consultancy Inc.’s workforce 79
4.8 Estimated excess earnings from the Consultancy Inc. brand 80
5.1 Revenue per consultant 86
5.2 Operating profit generated by the Consultancy Inc. brand 87
5.3 Discounted cash flows and value of the Consultancy Inc.
brand 88
6.1 Forecast revenues 2015–2019 95
6.2 Forecast revenues 2015–2022 95
6.3 Study of brand awareness in the leather goods sector 96
6.4 Estimated gross royalties of the Traveller brand 96
6.5 Net royalties of the Traveller brand 97
6.6 Present value of net royalties of the Traveller brand 97
6.7 Value of the Traveller brand 98
6.8 Ranges of royalty rates by sector and brand type—as a
per cent of revenue 100
7.1 Trading multiples of companies in the luxury apparel sector
(7 October 2015) 105
7.2 Transaction multiple on recent sports apparel companies 106
8.1 Creation and development costs of the “Acajou” brand 114
8.2 Valuation of the “Acajou” brand at capitalised
historical costs 115
8.3 Reproduction costs of the “Acajou” brand 116
9.1 Available data and valuation methods applicable to brands 128
10.1 Advantages and disadvantages of ad hoc brand valuation
models 137
10.2 Factors impacting the Interbrand discount rate 139
10.3 Interbrand ranking of the ten highest-value brands
(2005–2014) 139
10.4 Definition of BrandFinance ratings 146
10.5 BrandFinance (2014) ranking and comparison with
Interbrand ($ billion) 146
10.6 Criteria included in the Brand Equity Evaluation System to
determine the pre-tax profit multiple 148
11.1 Similarity between options and brands 156
11.2 Validity of additive and combinatory models 158
A.1 Median beta by industry sector (GICS) 172
A.2 Median cost of capital by industry sector (GICS) 174
Figures
1.1 The brand life cycle 15
1.2 Sporting goods brands ranked by brand awareness amongst
US consumers in 2014 24
2.1 Mapping of the different brand valuation methods 37
3.1 Decision tree for an impairment test under IAS 36 49
Tables and Figures ix
3.2 Evolution of the book-to-market ratio of FTSE 100
companies 58
3.3 Evolution of shareholders’ funds and market capitalisation
from 1990 to 2014 59
3.4 Other intangible assets of FTSE 100s as a per cent of total
assets (average) 62
3.5 Recognition of intangible assets by the five most intangible-
intensive companies (as a per cent of total assets) 62
4.1 Cost of capital by asset category 81
7.1 Purchase price allocation of the Reebok acquisition 107
7.2 Purchase price allocation of the Umbro acquisition 108
9.1 Variation in 2005–2010 in the number of companies with a
higher book value than market capitalisation (as a per cent
of the number of companies making up the two indices) 122
10.1 Movements in Apple brand value and market capitalisation
(Base 100 in 2001) 141
10.2 Movements in McDonald’s brand value and market
capitalisation (Base 100 in 2001) 141
10.3 Movements in Coca-Cola brand value and market
capitalisation (Base 100 in 2001) 142
10.4 Movements in GE’s brand value and market capitalisation
(Base 100 in 2001) 142
11.1 Standard valuation model and representation rule 159
11.2 Valuation reflecting the combinatory nature of
intangible assets 160
A.1 Balance sheet and cost of capital 170