‘How would you incorporate our brand value in our company valuation?’ A friend of mine was recently asked this question by a corporate professional. It is a pretty interesting question when you think of it. Let me start the answer with the definition of ‘brand equity’ according to wikipedia.
“Brand equity is a phrase used in the marketing industry which describes the value of having a well-known brand name, based on the idea that the owner of a well-known brand name can generate more money from products with that brand name than from products with a less well known name, as consumers believe that a product with a well-known name is better than products with less well-known names.”
The answer to the original question is actually very simple. If a company really has ‘brand value’ then it will be able to charge a higher price to its customer compared to its peers (think of Apple iPhones vs other phones) or sell higher volumes even if they charge similar prices. Being able to sell higher volumes or at higher prices clearly leads to higher revenues, profits and free cash flow (the holy grail of financial metric to us finance people).
Therefore whether we are valuing the company using a Discounted Cash Flow or some multiple like Price/Earnings, Price/Sales the brand value will automatically get incorporated in the financial numbers. There is no need to separately put a value on brand.
The moral of the story is that if your ‘so called’ brand does not allow you to generate higher cash flows then according to finance the company actually does not have any brand value.