How to value ‘brand value’ during company valuation?

‘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.

Asif Khan, CFA

Asif Khan is presently a Research Analyst (Financial Sector) for Exotix which is a frontier market focused investment bank. He has more than 6 years of work experience as equity analyst in both buy and sell side roles across Asian frontier markets. Asif is a CFA Charterholder and has a dual major in Finance & Economics from North South University.

8 thoughts on “How to value ‘brand value’ during company valuation?

  1. Asif,
    Good write up.
    Agreed to the part that brand value will be incorportaed in the financial numbers anyway. However, separating out the effect of brand value (partial analysis) or disintegrating the value might be useful in some contexts. I personally feel if some corporation claims that their revenue is increasing because of brand value, i would like to know “by how much ” and if a number value is not assigned, validity of such claims is not substantiated for all practical purposes.
    The approach to which this value would be estimated is arguable. If no straightforward measure is found, one can always restore to residual value. Meaning, if we can separate out the effects of all the measureable factors contributing to increasing sales, the unaccounted part may be due to brand value.

    1. There are actually some ways of figuring out the brand value part. An easy way is to see the price differential of the product and see how much of the companys value is due to the price differential. For example if we are paying 100 taka for a Gillette razor but only 50 taka for some other brand then this 50 taka difference can be attributed to the brand value. Actually what you mentiom is quite similar to my line of thought here.

      1. Yes, similar line of thought here. I actually had same conversation with a marketing prof at U Waterloo about a year ago. He mentioned some articles, never really got a chance to look at those 😀

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