Sample frameDay 350·Brand Management · Valuation

Your accountant isn't allowed to put your brand on your balance sheet. That isn't a reason to leave it unpriced.

Brand Management.

Brand Valuation

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The question

If someone offered to buy the business this quarter on the condition that the name stayed behind — same products, same people, same customers, a different badge on all of it — how much would you take off the price, and could you defend that figure for longer than a sentence? Most owners have never put a number on the difference. It's the largest thing they've built and the only asset they've never priced.

The idea

In 1988 the British food group Rank Hovis McDougall was fighting a hostile bid from Goodman Fielder Wattie, and its defence rested on an awkward fact: Hovis, Bisto and Mr Kipling were doing most of the work and appeared nowhere in the accounts. So RHM had its brands valued by Interbrand and put them on the balance sheet, the ones it had grown itself included — the first company to do it, and the bid was seen off. Standard-setters eventually closed that door; under IAS 38 a brand you built yourself still can't go on your own balance sheet. The method outlived the accounting because it was never really an accounting instrument. It's two numbers multiplied and a third that sets the rate they are discounted at: what the branded business genuinely earns once its capital has been paid for, what share of that earning the name is responsible for rather than price or habit or shelf position, and how safely those earnings repeat. ISO 10668, published in 2010, made the shape official and added a module most people skip: a legal check that you own the marks you're valuing. The trap is reading the output as a trophy. The number is the least interesting part; the three inputs are the diagnosis.

The framework

01
Economic earnings — what's left once the capital has been paid for.
Day 142 built invested capital and Day 156 set the bar it has to clear; a brand valuation starts where those two meet. Take the branded segment's operating profit after the tax you actually paid, charge it for the capital tied up in producing that profit, and the residual is economic earnings. Run it on the segment the name actually covers rather than the group, or you'll be valuing an average nobody buys. And accept a negative answer if you get one — a business can be busy, growing and admired while returning nothing above the cost of the money it consumes, and no brand value sits on top of that.
02
How much of the decision is the name?
The second number is the share of those earnings the name is responsible for, and it isn't a mood. Buyers choose you for a bundle of reasons — price, availability, switching cost, a contract, the rep they like — and only part of that bundle is the name. Interbrand derives it from research into what drives choice in the category. You can approximate it in an afternoon: ask your last ten buyers to split a hundred points each across their reasons, total the points on reputation, and divide by a thousand. Three hundred points across ten buyers is thirty per cent, not three hundred. Brand earnings are economic earnings times that share.
03
The third number is risk, and it prices what you never fixed.
The third number asks how safely those brand earnings repeat, and it arrives as a rate rather than a multiplier. A brand that's clear about what it stands for, consistent in its assets, present in the buying situation and properly protected carries less risk, so its future earnings get discounted gently and the value rises. A vague one gets a punishing rate applied to identical earnings. Don't reach for the strength sum from the Brand Asset Valuator morning here — that one leads, telling you where the brand is heading; this one prices how safely it will keep earning once it arrives. And this is where the rest of the discipline turns into money: every weakness you've catalogued and not fixed stops being a marketing item and becomes a percentage point on the rate, charged against every dollar the name will ever earn.
04
Run it against your own last number, never against Coca-Cola.
The absolute figure means little outside a transaction — it rests on assumptions a buyer would argue with for a week, and league tables invite you to compare across businesses that share nothing. What's useful is the same calculation, same assumptions, repeated once a year, so you can see which of the three inputs moved. Earnings up but role of brand down means you bought volume with price. Role steady and risk rising means you're living off memory you've stopped topping up. Publish the workings next to the number, or next year's version will quietly be re-specified until it flatters you.

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