Stuart Whitwell explains that accountants should ignore brand valuation at their peril
VERY RARELY does a barman hear a request for a bourbon and coke – it’ll be a Jack Daniels and coke please, or even a JD. Instantly, the barman knows what to pour. Brands are arguably invaluable and establishing a successful one can take years – 146 in Jack Daniels’ case.
For accountants, factoring this brand value into their calculations when advising on deals isn’t one of the highest priorities but increasingly, it is vital that this intangible worth is brought to the fore during negotiations.
The £300 million buy and build acquisition of Ypióca by drinks giant Diageo recently, highlights the importance of brand value. A handful of industry analysts have commented this price tag is too high – arguably because they just don’t understand how a brand like this is valued.
However, scratch beneath the surface, and you’ll find that Brazilian brand Ypióca leads the, alcohol distilled from sugarcane, cachaça market. With the upcoming World Cup in 2014 and the next Olympics both to be hosted in Brazil, the demand for the sugarcane liquor is expected to rocket at this time, making Diageo’s deal a sweet one.
The number of buy and build acquisitions is expected to increase, especially given the comparatively low risk for bigger companies looking to invest in a solid proposition, the quick returns and in-roads into new markets these types of deals can provide. It is therefore important accountants get to grips with the role brand value has to play in these deals, allowing parties on both sides of the table to accurately value both the tangible and intangible assets on offer.
Brand valuation can be a complex process, and it is advisable to take on a brand valuation expert to help accountants and other advisors to broker the best possible deal. This process will take into account a company’s trademark, copyright and design rights, recipes, and formulations and evaluate the value earned purely from these assets, among other factors.
It is also important to appreciate the prominence of the brand in the overall portfolio, as other synergies such as brand muscle and volume scale can add significantly to the overall bottom line.
Brand valuation is usually conducted in accordance with both International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP) accounting standards. Like other assets, brands are valued according to income, market and cost. Calculating the income involves a deep understanding of how brands drive value and discounting future revenue to a current day value. To evaluate the market, its participants and transactions are taken into account and assesses costs by considering the price of replacing or recreating the brand.
Last year, the Financial Reporting Council noted that insufficient information was often provided about intangible assets during the acquisition process, so it is vital this is taken into account. But, even if accountants are not advising clients on potential acquisitions, there are still plenty of benefits from undertaking a valuation of the client’s own brand – exposing strengths and weaknesses and helping the business to capitalise on opportunities in their market.
Mergers and acquisition activity may currently be muted, but a gradual return to higher levels is expected. It is therefore essential accountants take into consideration intangible assets into the equation, raise a glass to brands and the extra value they can provide.
Stuart Whitwell is joint managing director Intangible Business