When company directors and industry analysts start pestering for more financial information on a particular element of their businesses, you know that element has come of corporate age.
This is happening with brands at the moment. On 23 December, companies will be required to list the value of intangible assets gained from acquisitions on their balance sheets, as part of a new accounting rule. Under this rule, named FRS 10, companies will have the option of listing the value of any brand acquired as a part of those intangible assets.
Many of them are likely to do this and will drive branding up the corporate agenda in the process, argues David Haigh, managing director of brand valuation consultancy Brand Finance. He is also the author of a Financial Times Retail & Consumer Publishing report on the subject, which comes out tomorrow.
However, the new rule is only part of a more general trend towards quantifying brands. Analysts and chief executives are starting to demand more quantitative information on a whole range of branding issues.
They use this, together with more traditional qualitative analysis, as a basis for a variety of business decisions. These include planning mergers and acquisitions, allocating marketing budgets and evaluating consultancies’ performances (see table).
“Analysts would like more information on companies’ marketing operations [which encompass branding], and chief executives are certainly demanding clearer and more detailed information too, because the brand is an extremely important financial lever in a company. It’s much more important now than five years ago,” says Interbrand Newell and Sorrell brand valuation director Alex Batchelor.
However, brand valuation is still a minority industry, with the majority of projects commissioned by a small proportion of larger clients, says Batchelor. Over the past six months INS’s brand valuation unit has worked for Allied Domecq, Bank of America, Bass, Orange, TNT, Samsung and Hewlett Packard.
Meanwhile, Virgin Group corporate affairs director Will Whitehorn says, despite extensive research on its brand, it has yet to produce a detailed valuation of it.
“However, it is something we will probably look at in the future,” he says.
Brand valuation services have only been available for around ten years, and are only offered by the big five accountancy firms and a handful of smaller operations.
A recent Brand Finance survey of 100 city analysts found 86 per cent think public companies do not provide adequate information on their marketing expenditure. They argue that the exclusion of intangible assets, including brands, from balance sheets has led to differences between the true value of a company and the value indicated in its financial statements, making it harder to make informed investment decisions.
Currently, brand-valuation details are closely guarded. “[Due to the sensitivity of the information] chief executives try to get away with giving away as little as possible, so the analysts’ demands have not really been satisfied,” says Batchelor. Nor does he think this will change much in the foreseeable future.
However, Haigh believes we will see more qualitative and quantitative information published on brands. This would be published along with the annual report, either in the main document or an attached booklet, he says.
Brand Finance recently announced a joint venture with Interpublic-owned consultancy Diefenbach Elkins Davies Baron in New York. This will see it working with the consultancy on a range of brand valuation projects undertaken by groups across the Interpublic fold.
“[The joint venture] taps into the increasing demand by clients to overlay traditional qualitative brand analysis, with quantitative techniques”, says Haigh.
Brand valuation techniques have improved significantly in recent years, according to Virgin’s Whitehorn. But its increasing use has more to do with the rise of marketing and the changing nature of businesses.
“Brand valuation is as much about planning the future as analysing the past. A firm’s relationship with its consumers is its future, and this is linked with its brand,” says Batchelor.
Batchelor says, for example, that many mergers fail because brands do not fit together. He points out that a mixture of qualitative and quantitative brand valuation techniques could pinpoint any potential problems and be used to help solve them.
“As well as that, the value of intangibles [like brands and knowledge] is now a much more significant part of a business than before. Innovations like the Internet mean the relationship of capital assets to the overall value of the business is tiny in some cases,” says Batchelor.
While brand valuation is increasingly based on fact, it is not an exact science. As such it can be subject to what might be termed creative accounting. For this reason, the new FRS 10 rule will not allow companies to put the value of home-grown brands on their balance sheets.
“Without an externally verifiable transaction to support such an internal brand valuation there is a clear danger of profit manipulation – creative accounting,” concedes Haigh in his new report, Brand Valuation: Understanding, Exploiting and Communicating Brand Values.
Ian Cochrane, of management consultancy Ticegroup, says: “In my opinion [the practice of brand valuation] is absolutely valid. Companies put so much investment in their brands, it is their big differentiator and it is essential for people to be able to put a value on it.”
And, as INS’s Batchelor points out, the idea of creative accounting is not a new one in more traditional elements of business.
Applications of brand valuation:
Balance sheet reporting: for some acquired brands
Merger and acquisition planning
Brand licensing and franchising decisions
Joint venture decisions
Allocating marketing budgets
Assessing new product development opportunities
Assessing new market opportunities
Evaluating a consultancy’s performance
Internal communications: to explain performance and motivate management