The notion of brand valuation is still arbitrary and nebulous to many decision makers. The question usually asked in this regard is how one can value what one cannot see or even touch. Well, the truth is that we value things of this nature more often than we imagine.
Brands as a form of intangible asset do carry financial value. So how then, does one place a financial value on brands or other forms of intangible assets, or better still, why should one value these assets.
A prime reason could be that these assets drive the earnings and cash flows of the businesses that own them. I am reminded of a powerful quote from John Stuart who was the Chief Executive Officer of Quaker Oats Company from 1922 to 1953.
He said “if this business were to split up, I would give you the property, plant, and equipment and I would take the brands and trademarks and I would fare better than you.” This statement illustrates the value that a brand places within the business. And knowing what this value is worth both quantitatively and qualitatively is absolutely crucial to your organisation’s growth strategy.
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What is also amazing to me is the period in which this statement was made. One can sensibly assume that this would have been between 1922 and 1953. This implies that even as far back then, Corporate America understood the value of brands and other forms of intangible assets and saw how they drive the value of a business.
If this was the collective wisdom of corporate America even back then, then it is no wonder that its economy was able to build strong global brands that were most recognisable beyond its shores, and also build a wealthy nation in the process.
The truth is that there has been a great shift in the global thinking behind what drives corporate value. This has shifted from tangible assets such as property, plant, equipment and inventory, to intangible assets such as technology, internally developed software, employee’s skills, patents, copyrights, and the most important of all, brands.
The notion of thinking of business value in terms of tangible assets is due to the misconception that the balance sheet presents a true picture of a business. However, the balance sheet does not reflect the value in your employees, the knowledge systems in your organisations, trademarks, patents, and brands.
As a result, it has been estimated that intangible assets now make up eighty percent of the value of most businesses. This is why an investor will pay excess purchase price over the net asset value of a company she intends to acquire.
This divergence between the net asset value and fair value speaks to what John Stuart was talking about. Nations that have built great wealth have done so because they truly understand this notion. We will also do well to understand it. They are truly the cornerstone of every enterprise, because it is the brand perception that drives repeat business, share prices, cost of capital and even the market capitalization.
Just as the responsibility of maximising the organisation’s share value rests with its Chief Financial Officer, the responsibility for managing the organisation’s brand value equally lies with the Chief Marketing Officer.
The Chief Marketing Officer is responsible for managing the business’s most valuable asset, yet the marketing leadership is seldom represented at the board level of most organisations. There seems to be a lack of understanding of the importance of brands and their role in creating shared value.
In most cases, they are merely seen as identifiers and their strategic attributes are often misplaced in the minds of decision makers, when indeed it is the brand that forms the emotional pact between the business’s product or service and its consumer, which results in a strong customer relationship that guarantees continuous demand and stable cash flows.
Brand Valuation provides an effective means of rectifying this situation. It creates a common lingua franca that aligns the different motivations of the finance and the marketing functions of the business.
This is because the return on the investment that went into the brand needs to be tracked, identified and justified. This usually involves all hands on deck, which will involve every function of the organization working together for the optimum total return on investment. It also allows the marketing function to make a compelling case for investment in brand assets.
Investment into the brand is absolutely crucial in creating a strong brand. But the value of the investment lies not necessarily in the amount invested, but how and where it’s invested. This is even more crucial in the post Covid times we are living in. In order for the investment to drive the strength of the brand, it must be channelled into meaningful communications that would powerfully enable the brand to be associated with its attributes in the mind of the consumers.
A strong brand of such encourages stability to demand. It also enables the business to sell its products and services at a premium even during any economic crisis, hence driving stable earnings and cash flow. Other growth opportunities such as licensing agreements can generate higher returns in form of royalties that a licensee will pay for the use of the brand. Employees are not left out.
A strong brand influences positive motivation amongst employees, which in turn will lead to customer satisfaction and drive-up revenue, earnings, and cash flow in the process. So, the ability to track and know how much your brand is contributing to both your top line and bottom line is absolutely crucial, as it enables you to effectively carry out your strategic options well. Management and leadership will do well to develop a thorough understanding of their intangible assets. This will enable them to effectively assess their impact on the overall value of their business.
Odumeru is the managing director, Brand Finance Nigeria, a brand valuation consultancy firm
