What it means
Brand value tries to put a figure on something intangible: the willingness of customers to choose and pay more for a familiar name. It is not the same as brand equity, which describes the strength of customer perception, though the two are closely linked.
Value is simply the financial translation of that strength. The number matters in three practical situations: buying or selling a business, licensing the name to a third party, and defending the brand in a legal dispute.
It also appears on balance sheets, but only when a brand has been purchased, since accounting rules do not allow companies to capitalise brands they built themselves. That is why a self-built brand can be worth a fortune and still show as nothing in the accounts.
The most common valuation approach is relief from royalty, which asks what the business would have to pay to rent the brand if it did not own it. You estimate a royalty rate typical for the sector, apply it to forecast revenue, deduct tax and discount the resulting stream back to today.
Other methods include the price premium approach, comparing prices against an unbranded equivalent, and the excess earnings approach. Every method rests on assumptions that can move the answer enormously.
Change the royalty rate from 3% to 4% and the value rises by a third; change the discount rate by two percentage points and the answer can shift by a fifth or more. Treat any single brand value as a range dressed up as a number.
Published league tables of the world's most valuable brands are useful illustrations but are built on public data and standard assumptions. For a private company, the only number that really matters is the one a buyer, a licensee or a court is willing to accept.
In practice
Real-world examples.
Example
A drinks group acquires a regional cider maker for $32 million when the net tangible assets are $9 million. The purchase price allocation attributes $14 million to the brand name and recipes, which then sits on the buyer's balance sheet as an identifiable intangible asset.
Example
A restaurant chain licenses its name and operating system to a franchise partner in another country for 5% of gross sales. The royalty stream, discounted over the ten-year term, gives the owners a concrete valuation of the name independent of any restaurant they run themselves.
Example
A clothing label pursues a counterfeiter through the courts and must quantify the damage. Its expert values the brand using the price premium method, comparing its average selling price with that of unbranded equivalents, to show what each fake sale actually cost.
Think of it
“Brand value is what your brand is worth in dollars-the financial value of brand equity.
Formula
Calculation
Relief from royalty, simplified to a perpetuity:
Brand Value = (Annual Revenue x Royalty Rate x (1 - Tax Rate)) / (Discount Rate - Growth Rate)
A speciality drinks company generates $50,000,000 of annual revenue. Comparable licensing deals in its sector run at a 3% royalty. Its tax rate is 25%, its cost of capital is 12%, and long-term growth is assumed at 4%.
Annual royalty = $50,000,000 x 3% = $1,500,000
After tax = $1,500,000 x (1 - 0.25) = $1,125,000
Capitalisation rate = 12% - 4% = 8%
Brand value = $1,125,000 / 0.08 = $14,062,500
So the brand is worth roughly $14.1 million on these assumptions. Raise the royalty rate to 4% and the same maths gives $2,000,000 x 0.75 / 0.08 = $18,750,000, a third higher, which shows how sensitive the answer is to a single input.Case study
Seen in the real world.
Aldermist Beverages is a fictional soft drinks company used here to show brand valuation in practice. Its founders were approached by a larger group and initially anchored on a multiple of profit, which produced an offer of around $11 million.
Their adviser ran a relief from royalty calculation using a 3% sector royalty rate against $50 million of revenue, a 25% tax rate, a 12% cost of capital and 4% long-term growth. That produced a brand value of about $14 million on its own, before any value for equipment, contracts or the distribution network.
In this illustrative example the sensitivity analysis mattered more than the headline. Because the valuation swung between roughly $11 million and $19 million depending on the royalty rate chosen, the founders spent their negotiating effort proving the brand commanded a shelf price premium, which is what ultimately justified the higher rate.
Watch out
Common mistakes.
- Assuming a brand shown at zero on the balance sheet is worth nothing, when internally generated brands simply cannot be recognised under accounting rules.
- Confusing brand value with goodwill, which is the whole premium paid over net assets and includes far more than the name.
- Quoting a single figure from one valuation method as if it were a fact rather than the output of chosen assumptions.
Questions
People also ask.
Why can I not put my own brand on the balance sheet?
Accounting standards only allow recognition of intangibles that were purchased, because the cost of building a brand yourself cannot be reliably separated from ordinary marketing spend.
Which royalty rate should I use?
Look at published licensing agreements in your sector, which commonly sit somewhere between 1% and 6% of revenue depending on how much the name drives the purchase decision.
Does brand value change if profits fall?
Yes, because every method depends on forecast revenue or earnings, so a sustained decline in trading reduces the value of the name attached to it.
From the founder's library
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