Methodology: How does brand finance calculate a brand’s value?

by Steve Brearton

It’s complicated, but the major steps in the process are fairly straightforward. Basically, a brand’s value is the current lump-sum value of the portion of its total future revenues attributable solely to the brand itself. Got that? Think of it this way: Suppose you wanted to make and sell Coca-Cola under licence. You’d certainly pay more than the cost of water, sugar and other ingredients, wouldn’t you? That’s because Coke is much more than a drink; it’s a 122-year-old global institution.

Brand Strength Index (BSI)
Brand Finance scores the brand from 0 to 100, using tangible measures, such as financial ratios, and more subjective ones, such as consumers’ emotional connection to the brand.

Brand Royalty Rate
Licensing agreements are common in many sectors, from clothing to technology. If companies in a sector typically pay between 5% and 10% of revenue to a brand’s owner for a licence, and a brand’s strength score is 80, its brand royalty rate is 9%.

Brand Revenues
Brand Finance consults forecasts of the after-tax revenues of a brand based on historic revenues, investment analysts’ estimates, economic growth projections and other factors. For one brand among several owned by one company, this can be a challenge.

Brand Value
Multiply the yearly forecast revenues by the brand royalty rate. Take the result for each year and calculate the so-called discounted value or net present value. For example, if long-term interest rates are 3%, $10 million 10 years from now is worth $7.4 million today

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