IF A BUSINESS goes bust its brand and intangibles must be worthless, right? Not necessarily. This is a common misconception and one that can land insolvency practitioners (IPs) and accounting firms in a bit of bother when dealing with insolvent situations. There is often a significant disconnect between company value and brand value.
Although the number of liquidations and corporate insolvencies is down year on year by 14% and 28% respectively, they are still at historic highs. There were 3,974 compulsory liquidations and creditors’ voluntary liquidations in England and Wales in the third quarter of 2010 and 1,141 other corporate insolvencies.
Some of the biggest names to fall victim to the recession included MFI, Waterford Wedgwood, Whittard, Woolworths and Viyella. All famous and valuable brand names with other valuable intangibles attached, such as design rights, trademarks, contracts, copyright, customer lists, databases and patents. Many other big brands have also nearly collapsed during their history, such as Marks & Spencer, Laura Ashley and Harley Davidson. Each time it wasn’t the brand that was the major problem but operational and management inefficiencies and once this changed, it was the brand that enabled the companies to return to prosperity. The value of the brands remained proportionally unaffected during the hiatus.
The disconnect between brand and company value
Brand value can bear no resemblance to a company’s share price, turnover or profitability for a number of reasons. An understanding of the mainstream valuation techniques helps shed light on this (see below). The company’s own revenue may not be the most suitable ones to reference the brand against if the company is insolvent or operating inefficiently. Hypothetical revenue may have to be forecast based on competitive or market activity and the brand attached to this. Profitability is also likely to be adversely impacted so an unsuitable reference point. A trademark owned by a distressed company may be inactive and therefore generating no value for that company, but may be just what a competitor is after.
Market and consumer research often highlights this disconnect with customers reacting to poor product or service delivery rather than brand preference, or lack of it. The same is true for lesser known businesses, which is why brand and intangible value should always be considered in insolvency situations, regardless of size or industry. Brand and intangible valuation is used by insolvency practitioners in determining an initial opinion of value, in ensuring arm’s length transaction prices in pre-packs, for investigating the transfer of assets at disputed values prior to liquidation, and for compliance with SIP 16.
Initial opinion of value
The actual identification of intangible assets can be tricky. Value can reside in unexpected places; a customer database, an inactive domain name, a trademark registration, some software, an archive of design material. The company or brand name – even though insolvent – can still have significant value so it’s always worth asking the question “is there any value there?”
Arm’s length transaction prices
Open market value does not always represent fair market value – a brand may be worth more than the market is prepared to pay at a particular time. Understanding the true value of the intangible asset is particularly relevant when marketing the asset openly may potentially risk damaging recoverable value. A brand valuation is therefore used to determine an arm’s length transaction value or to assist discrete negotiations with interested parties to maximise returns.
Investigation of asset transfers
Assets are sometimes transferred, inadvertently or otherwise, in the months prior to seeking insolvency advice or entering a formal insolvency process. These assets – often contracts – may have been transferred at an undervalue so an independent valuation can be used to resolve the dispute, provide leverage for negotiation, avoid lengthy legal proceedings and facilitate a more efficient recovery for creditors.
SIP 16 compliance
SIP 16 requires IPs to provide assurance to creditors that pre-packs have been carried out with appropriate transparency and diligence. As the value in intangible assets is often less understood than the value of say tangible property, it is potentially more open to abuse. To protect themselves and creditors, IPs should pay particular attention to the intangible assets involved and ensure value has been considered.
As 80% of IPs expect their workload to increase over the next 12 months and 80% of the value of most companies is intangible value, this issue will remain an important one for IPs to consider for the foreseeable future.
Stuart Whitwell is joint managing director of brand valuation consultancy Intangible Business
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