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Research Papers

Brand has value which can be quantified

by R. Krishnaswamy on April 11, 2010

From the foregoing it is clear that the brand has a value and it can be quantified.  The ACTUARIAL BRAND VALUATION advocated above is ideally suitable for Indian conditions.  It will be also be clear from the above that this valuation is going to be of immense help to companies in so many areas.  It brings out the value of a real asset, which has remained hidden so far.  Reporting of the value of this invisible asset will immensely enhance the company’s image and push up its stock market value leading to more sales which in turn will lead to economies of the scale which in turn again will bring down the cost of production.  It is also very useful in cases of acquisition/ merger/ takeover/ licensing/ franchising/ joint venture etc.  Particularly for the Banks which lend money to the companies against its assets, the brand valuation is a boon as the Bank can now be more aware of the additional security that is available. Also in the software industry there has been a lot of acquisitions not only of companies and brand but also of “Intellectual Property” traits such as trade marks, patents, copyrights and designs, know-how, technology, software and databases.  These intangible assets also have the same valuation issues as Brand and can be valued by the methodology described above.

We would like to close this paper with a quote from Pemberton (1998).

“Actuarial Science has a distinctive method which is well-suited to operating within realities in which there are limited regularities.  It uses local empirical knowledge to grasp low-level generalisations, has respect for the pattern of local causal influences, and builds bottom-up models for the purpose of establishing approximations.  It recognises the role of skill in applied modelling and treats it as central to the method.   It is focussed on financial realities”.

Spurred by this quote, we have made a modest attempt to extend the Methodology of Actuarial Science to an area of contemporary concern in Corporate Finance.

In fine, it is no exaggeration to say that a brand revolution is now on and its importance is next only to IT revolution.  We can very well say that B(G)rand days are ahead.

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Brand valuation methodologies

by R. Krishnaswamy on April 11, 2010

We shall now see briefly the various valuation methods that are adopted in arriving at the value of brands and dwell more in detail about the methodology suitable to the Indian conditions.

The methodologies adopted for valuation of brands can be distilled into three broad strands:

  • Cost-Based
  • Market-Based
  • Economic-Based

Any method chosen should necessarily satisfy the criteria of credibility, objectivity, reliability, cost effectiveness and consistency.

Cost-Based Methodologies:  The two main cost-based methodologies for valuing brands are Historical Cost Approach and Replacement Cost Approach.  The Historical Cost Approach measures the actual cost incurred in creating the brand; the Replacement Cost approach, on the other hand, quantifies the estimated cost of replacing the brand or recreating an equivalent brand.  Even assuming that historical cost data of the brand is available and/or the replacement cost can be estimated with a reasonable degree of reliability and confidence, these approaches are generally inappropriate.  The reason is that cost is not relevant for determining the value of a brand, which, is derived from future economic benefits.  There is no direct correlation between expenditure on an asset and its value.  Probably one of the few occasions where cost can be a relevant benchmark is one where the brand has been recently acquired.

Market-Based Methodology:

The value of the brand is determined by reference to the prices obtained for comparable brands in recent merger/acquisition transactions.  Apparently the methodology sounds simple, attractive, and objective. But the methodology is frequently impractical due to lack of market information.  Arm’s length transactions involving similar brands in similar industries are infrequent, given the uniqueness of individual brands.  In addition, for transactions that are comparable, it is likely that market and financial information concerning the asset will not be publicly available.  However this method can be used as a counter check.

Economic-Based Methodologies:

These approaches consider economic value of a brand to the current owner i.e. the return the owner actually achieves as a result of owning the brand – the brand’s net contribution to the business both now and in the future.  The two commonly used approaches under this category are (a) Discounted Cash Flow (DCF) approach, and (b) Earnings Multiple approach.

Both the methods involve in the first instance identifying, separating and quantifying the cash flows attributable to the Brand.  Under the Earnings Multiple approach, the cash profit is multiplied by what is known as earnings multiple which in turn is estimated on the basis of various attributes of Brand such as  Leadership, Stability, Market position, Internationality, Support and Protection.

Under the DCF approach the brand related cash profit is projected over a period of next say five or ten years. Assuming a steady state scenario (stable growth phase) thereafter, the brand-related cash flow stream is discounted to the present value using an appropriate rate of discount.

Out of the above two approaches, the earnings multiple approach is easy to use, but it is not based on strong conceptual underpinning.

Generally DCF approach is considered as the conceptually superior method of Brand Valuation.

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Why value Brands?

April 11, 2010

The recent years have witnessed a growing awareness among corporates about the financial power of the brands they own.  There are two reasons for this phenomenon. First, there has been mounting evidence to support the hypothesis that consumers are becoming increasingly brand conscious not just in relation to products which are earmarked for conspicuous consumption, [...]

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Actuarial Brand Valuation

April 11, 2010

Our paper focuses on the application of the actuarial methodology to corporate finance. One of the contemporary concerns in Applied Corporate Finance has been the valuation of intangible assets in general and valuation of brands in particular.  In a recent survey conducted among the CEOs of software companies in India, it has been found that [...]

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Brand Valuation

April 11, 2010

Being skilled mathematicians, Actuaries are able to analyse past events, assess the present risks involved, and model what could happen in the future.  Actuaries then forecast the long-term financial implications of business decisions to assess the most likely outcome and the chances of more or less favourable outcomes occurring.  Traditionally, actuaries have played a vital [...]

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Unleashing the financial power of brands

April 11, 2010

An Actuarial Approach (Presented to the 3rd Global Conference of Actuaries held on 15th and 16th February, 2001 at New Delhi) and Published in THE HINDU ABSTRACT Consumers are becoming increasingly brand conscious.  Most of the consumer’s purchase decisions are now brand driven.  This has created a growing awareness among Corporates about the Financial Power [...]

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Determining Discount Rates for Employee Benefit Valuations

April 5, 2010

1.1    Discount rates are the heart of almost all actuarial and long term financial models.  In the recent times there has been growing interest in the theory and practice related to determination of discount rates.  One such recent development has been the decision of the Institute of Actuaries, UK to commission a thought – leadership [...]

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