Customers and stakeholders are brand savvy. They know a good brand when they see one. And as business owners, so do you. Your business’ brand—everything from brand names, trademarks and logos, signage, Websites and domain names, packaging and advertising campaigns–identifies and differentiates your product or service, attracts and retains customers and communicates corporate values to customers, suppliers and employees. As Chartered Business Valuators, we’re writing about it here because how your brand is perceived impacts how your business is valued.

In most successful businesses, a brand is a key component of overall intangible value (i.e. goodwill). Strong, established brands allow for premium pricing and therefore higher profit margins, enjoy reduced advertising expenditures and an easier foray of new products into the market under the existing brand banner and give a perception of consistency (across a product line or from location to location, as examples). Importantly, it differentiates you from your competition.

A classic example is the Loblaws’ Presidents Choice product line. Loblaws took advantage of the initial buzz created by its house brand to introduce a wide range of new, premium priced private label products, which drove customers to their stores.

The Financial Value of a Brand

While marketing experts are best equipped to measure the success of a brand in influencing customer behaviour, as professional business valuators we assess the following factors in measuring the financial value of a brand:

Extent of customer recognition

We look at empirical market data regarding brand awareness and the influence of the brand on the decision to purchase a product or service. In many industries, the significant cost of developing customer brand recognition and awareness creates a significant barrier to the introduction and development of new products and services.

Age/longevity

How long has the brand been in existence and is its appeal fleeting or long-lived? A brand with an established history is more likely to retain customer recognition in the future.

Associations

Is the brand positively associated with a historic or distinguished person (e.g. Laura Secord, Alexander Keith, Calvin Klein), location or setting (e.g. Rainforest Café, brands named after neighbourhoods of New York City, such as Soho)? Of course the value of a brand can plummet when an association becomes negative, such as if the “face” of a brand becomes involved in a scandal.

Market share

A larger market share often leads to greater and more enduring recognition and profitability.

Leveragability or potential for expansion or exploitation

Can the brand be effectively used for new products or product extensions (such as using an apparel brand to sell watches or Loblaws extending the President’s Choice brand to their banking business)?

Profitability

Does the brand contribute to profitability of the business through premium pricing or lower advertising costs?

Advertising

Highly advertised and promoted brands may have already achieved critical mass of recognition and are more likely to continue to retain or develop increasing levels of recognition. Does the advertising campaign include a catchy or memorable catch phrase or image (e.g. the animals of Telus advertisements)?

Means of promoting

The availability of a range of media channels to promote the brand can enhance the efficiency and effectiveness of branding.

Protection

Are elements of the brand legally protected (or can they be)?

Geographic appeal/use

Consider the extent to which the brand does (or would) have cross-cultural, national or international appeal, or whether its appeal is more localized, and limited. 

We consider all of these factors when valuing businesses and use one or more of the following methods to put a number on a brand:

Incremental profits

This calculation is based on the future value of the incremental profits contributed by the brand (through premium pricing and/or reduced advertising and other costs).

Royalty relief

Based on the costs avoided as a result of the ownership of the brand. What royalties would have to be paid to license the brand, if it was not already owned by the business?

Replacement cost

Based on the costs that would be incurred to recreate the brand which are avoided as a result of the ownership of the brand. Costs include marketing consulting and design, legal, advertising and promotion, signage, website design, stationery, uniforms, etc.

Taking care of your brand is an everyday task for the life of your business. Investing in using the value drivers we mention here can shape your customers’ perception of your business and build your presence in your industry. Having an effective brand strategy in place will help to drive your business value and command an attractive price when you are ready to sell or transfer ownership of your business.

This article is was originally published for Canadian Capital on June 22, 2011. Read the original article here.

Steven Hacker, CA, CBV and Amanda Salvatori, CA, CBV are Chartered Business Valuators with the firm MNP LLP and have valued several well known brands, trademarks and domain names 

About MNP

MNP is one of the largest chartered accountancy and consulting firms in Canada, providing client-focused accounting, taxation and consulting advice. National in scope and local in focus, MNP has proudly served individuals and public and private companies for more than 65 years. Through the development of strong relationships, MNP provides organizations with personalized strategies and a local perspective to help them succeed. For more information, visit www.mnp.ca or www.mnpdebt.ca.