Paulo de Lencastre, Catholic University of Portugal, Porto, Portugal,
plencastre@porto.ucp.pt
Nuno Côrte-Real, Catholic University of Portugal, Porto, Portugal,
ncortereal@porto.ucp.pt
Ana Côrte-Real, Catholic University of Portugal, Porto, Portugal,
acortereal@porto.ucp.pt
Cosme Almeida*, Catholic University of Portugal, Porto, Portugal,
cealmeida@porto.ucp.pt
Pedro Veloso, Catholic University of Portugal, Porto, Portugal,
pedro.veloso@wisemix.pt
Abstract
Purpose – The purpose of this paper is to present a method of financial brand
valuation solely based on the accounting information of its proprietary entity and on the
response of the stakeholders who generate cash-ins and cash-outs.
Design/methodology/approach – The ISO standard, which regulates the financial
brand valuation, defines brand as an "intangible marketing asset". This implies that we
are effectively evaluating their identity signs or trademarks, protected as intellectual
property rights, in their capacity to generate economic benefits for their owners. A
questionnaire model is proposed that allows the simulation of future cash-flows from
Markov transition matrices. We arrive to "trademark influence" by asking the
respondents about their behavior in a scenario of change to unknown identity signs. In
the discount of the cash flows the "influence of risk" is calculated from the affective
response obtained from a Fishbein matrix integrally constructed by the respondents.
Findings – The method allows to obtain stakeholders information that can support a
good prediction of the cash-flows and their risk, giving reliability to the financial
evaluation.
Limitations – The "core" questions of the questionnaire on changing the identity signs
require adjustments to the profile of stakeholders and their understanding of the
situation.
Originality – An exclusively stakeholders based valuation internalizes the forecasting
and updating of cash-flows, purging them of always subjective influences of top
management or experts.
Key Words – Brand equity, Financial brand value, Trademark valuation, Intangible
assets valuation, Brand risk.
Paper type – Conceptual paper.
1. Introduction
In the method being proposed, brand is considered in accordance with the definition
established in the current standard that regulates its financial valuation (ISO 10668 on
“Brand Valuation: Requirements for Monetary Brand Valuation"):
"Brand is an intangible marketing asset that, while not limited to, includes names,
terms, signs, symbols, logos and designs, or a combination of all of them, intended to
identify products, services or entities, or a combination of them, creating images and
distinctive associations in the minds of brand stakeholders, generating economic
benefits / values "(ISO, 2010).
As recommended in the standard, the proposed method uses and articulates market
information (marketing) with financial information (see Simon and Sullivan, 1993;
Kerin and Sethuraman, 1998; Leone et al., 2006; Bahadir et al., 2008; Davcik et al.,
2015). More specifically, as we will see, it favors the primary information obtained in
the market to reach indicators of financial nature.
The sign or signs of brand identity are defined as an intangible asset because they are
potential generators of future cash flows to their owner or potential owner, i.e. they
may contribute to increase their future cash-ins or decrease their future cash-outs.
Because they are intangible, they are regulated as intellectual property rights and are
usually referred to in legal terminology as "trademarks" (WIPO, 2017).
Legal regulation results from the need that identity signs of products, services or
entities to be protected in order to guarantee their owner their exclusive use. If such
exclusivity did not exist, such signs would not fulfill their task of identifying and
differentiating an offer to the market, thus not creating "value" for the owner. In
addition, international accounting standards are clear in requiring, for a good or right
to be considered an asset, among others, the characteristic of "control", meaning "the
ability of the owner to ensure its exclusive use or, for other words, to ensure that it is
not used by third parties "(IFRS, 2004).
From this point forward, the specific term "trademark" shall be used throughout this
article whenever we intend to mean the identifiable signs of products, services or
entities legally registrable and protected (name, logo, etc.). It refers to intangible
assets that are being effectively evaluated. The term "brand" shall be used whenever
we intend to mean, more generally, not only the identifying signs, but also its object
(products, services or entities) and the response it provokes in its stakeholders
(associations, awareness, preference, use, etc.; Lencastre and Côrte-Real, 2010). They
are the sources of trademarks value.
2. Financial valuation of assets
It is now consensual in financial theory that the value of an asset should correspond, at
a given moment, to the discounted value to that moment of the future economic
benefits that it will generate. It has long been considered that "the value of any good
or property right is its value as a source of income generation and is determined by the
updating of the future incomes expected of it" (Irving Fisher, 1930).
In modern financial theory, despite of the evolution that has been verified in
accounting in terms of the principles and valuation criteria of assets (convergence with
finance), the idea is that the value of an asset should not be based on accounting book
values (NI-NET Income, EVA – Economic Value Added, etc.). By nature, accounting
values are conditioned by criteria and principles of their own and fundamentally based
on cost criteria. They are not based on cash flows. As Bodie and Merton (2000) point
out, reflecting a very common notion advocated by financiers, "for financial decision,
book value is generally irrelevant."
It is, moreover, this divergence between accounting and finance or, in other words,
between accounting value – mostly cost-based – and financial value – based on future
economic benefits – that leads to a brand only being reflected in the balance sheet if it
is acquired and therefore measured by its cost (acquisition price). The truth is that, as
Ross (2002) says, "We want to know how much an asset is worth, not how much it
costs".
The superior independence, transparency and realism of cash-flows justify the
preference of the financial community for financial valuation methods that consider
them as future economic benefits.
In this sense, the financial value of an identity sign (or of a set of signs as is usually the
case: a name, a logo, a slogan, etc.) registrable and protectable as a trademark will
depend on two fundamental elements: determining the contribution of this sign to the
future cash-flows of its owner – which will correspond to the "trademark influence" –
and, on the other hand, the determination of the discount rate of these future cash
flows – which will reflect the "risk influence".
3. A method of financial brand valuation
In this method it is proposed to determine those two elements based, fundamentally,
on the market response. Its main objective is to free the method from the experts'
influence, as opposed to most of the other methods (see Salinas, 2009; Smith and
Richey, 2012). This influence, through the subjectivity and discretion it introduces in
the methods, leads to very dubious metrics and, consequently, to unreliable values.
The influence of the experts invariably translates into the selection of indicators whose
meaning, interpretation and contribution are highly debatable for both the "trademark
influence" and the "risk influence". On the other hand, in some situations, even when
it seems to make theoretical sense to select a given indicator, its applicability is
practically null because of the difficulty of obtaining a response from the stakeholders.
In these situations, the question is of such complex form or technique that even an
expert has difficulty in answering.
As an example, how do you interpret or measure and what contribute to the model do
you get from indicators like "brand clarity" or "brand consistency"? And when it comes
to calling the market to pronounce on them, are the questions intelligible and the
answers reliable? When you conclude that distribution channels (e.g. "store
proximity") are an important driver in the buying process and the consumer is asked
"How much of proximity is brand and how much is not it?" Will someone, even as an
expert, know how to give this answer and, above all, a reliable answer?
Even at the exclusive level of experts, how can we assess the contribution of "brand
investment"? Is it too much and bad or little but good? Is it very much in absolute
value and little in relative value (compared to competitors)? And how to measure the
contribution of "brand antiquity"? Or even utilitarian indicators, theoretically more
obvious, such as "market share", how do they establish its connections with the
"trademark influence" or "risk influence"?
It is these difficulties that the proposed method tries to overcome, putting the focus
on the stakeholders response.
To explain the method of determining the two fundamental elements for the financial
evaluation of a brand, we will start with the "trademark influence", afterwards treating
the "risk influence".
This order is not arbitrary but rather is intended to be consistent with the logic of the
method itself. Indeed, as we will see, it seeks to determine the "trademark influence"
by directly analyzing the behavioral response of the respondents. Only then, through
his affective response, does it determine the "risk influence". In other words, we can
say that in the first place we observe the behavior and only after that the affective
motives of this behavior. We go in the opposite direction of the attitude dynamics,
namely the theory of the hierarchy of effects (Lavidge and Steiner, 1961). The phase of
determining the "risk influence" is thus, simultaneously, a phase of "psychoanalysis"
aimed at understanding the buying behavior.
4. Trademark influence
The "trademark influence" can be reflected in the selling price and / or in the
quantities sold. It could allow to sell more expensive and / or sell more (also, of course,
the opposite: to cause lower prices and / or lower sales). Therefore the influence
should undoubtedly result from the difference in cash-flow from the sale of the same
product (broadly: an entity's product or service) with and without a trademark. It is
assumed that a product with an unknown trademark - without any awareness and
therefore without any associations – will be equivalent to a product without a
trademark.
The proposed method seeks to obtain this information by questioning the brand
stakeholders – it means representative samples of the various audiences that interest
the brand, generators of cash-ins or cash-outs. We question their attitude – considered
in the three components, cognitive, affective and behavioral – in relation to the brand:
awareness, preference and use. In the case of a multi-product brand, the respondent is
called upon to refer to the product (s) of the brand that he knows, and from then on,
and if justified, there will be as many questionnaires as there are branded products
known by him.
For each brand product respondents who know it are asked about their purchasing
decisions: how much did they buy this year (year n) from our brand (the evaluated
brand) and from other brands, repeating the same questions for the previous year
(year n - 1). They are also called upon to indicate their purchase intentions for the
following year (year n + 1), in particular if they intend to buy more or less of this
product and which brands they will choose. Likewise, respondents who said they did
not consume the product are asked if they would do so in the future (in n + 1) and, if
so, which brands they would choose. Probably in the overwhelming majority of
situations it will be very difficult for a respondent to answer these questions in an
amount spent. So he will be asked for answers in relative amounts or quotas (e.g. "I
buy 80% of this brand and 20% of other brands”).
This means that the monetary value of purchases is determined assuming an identical
consumption per respondent, his average consumption. Where appropriate, the
sample is stratified, not only by the different public – consumers, suppliers, financiers,
internal public, etc. – as well as, in each of them, by relevant segments – e.g.
distribution, small retail and final consumers. In these situations, the assumption of
identical consumption per respondent would, of course, be applied in each of these
segments.
Based on this information, it is possible to estimate the owner's cash-in in year n + 1.
Knowing its cost structure – fixed and variable costs – it is also possible to estimate the
cash-out of year n + 1 and, consequently, estimate its cash-flow for that year.
Next, the respondents are confronted with the scenario where the product changes its
brand (brand being evaluated) adopting another one completely unknown to them. It
is assumed that a product with a brand unknown on the market – with no notoriety
and therefore without any associations - will be equivalent to an unbranded product. It
should be noted that at the beginning of the questionnaire, when the respondents are
asked if they know the brand being evaluated, the name of the brand is mentioned.
Normally the name is the most used trademark in identifying immediately a brand.
Afterwards, it is asked if they identify this brand equally by other sign(s). In this sense,
in the brand change scenario, the question that is asked to the respondents is "if all
the signs by which the brand is identified change...". In doing so, the respondent is
"helped" to understand the scenario. And, in doing so, we try to assess the identity of
the brand in its integrity even though, in the overwhelming majority of situations, the
respondent has no perfect notion of "brand" concept and even less of the "trademark"
concept.
In this brand change scenario respondents respond to the same questions as they had
already answered, i.e. whether or not they changed their purchasing behavior in year n
+ 1 and, if so, how they changed it.
It should be noted that the questions that are posed to the respondents are all simple,
direct, unambiguous or technically demanding, not requiring any specific knowledge
from them.
These two scenarios allow us to estimate two cash-flows for year n + 1: one with the
trademark being evaluated and the other with a trademark that says nothing to the
market, that is, without a brand. It is therefore legitimate to accept that the difference
between the two cash-flows will be derived from the existence of the trademark being
evaluated.
It would not make sense and would certainly require a lot from respondents to ask
them their purchase intention for the following years, i.e. for n + 2, n + 3, and so on. In
this sense, that is, with the objective of estimating both cash flows - the cash-flow with
the trademark being evaluated and the cash flow with the new trademark – in addition
to year n + 1, it is proposed the use of a simulation model, in particular a Markovian
process (see Markov, 1971).
In this, we take as initial vector the quotas obtained in the study for year n + 1, as
follows:
The transition matrix is constructed on the basis of the information obtained in the
study on the brand changes (transitions) for years n - 1, n and n + 1 and, possibly,
based on available historical data. In the most pessimistic scenario (but perhaps the
most realistic) there is no history of transitions between brands. In this case it is
proposed to construct the matrix based on the average values of the transitions of the
three years made available by the study, as exemplified by:
Considering all possible transitions in this way, we obtain the following transition
matrix:
Finally, with the initial vector and the transition matrix defined, the Markov chain can
be started by its successive multiplication:
The successive vectors obtained will allow us to calculate the quotas and,
consequently, the cash-flows of years n + 2, n + 3, etc. When the process converges,
i.e. when the stationary vector is reached, the respective quotas will allow us to define
the annuity of cash flow (1).
Brand Others None
%B %O %N
%B = market share of evaluated brand
%O = market share of other brand
%N = market share of non users of the brand
n-1 n n+1 average
%BO 8% 6% 10% 8%
%BO respondants who bought B and changed/will change to O other brands
n
%B , %O, % N * %BB %BO %BN
%OB %OO %ON
%NB %NO %NN
Brand Others None
Brand %BB %BO %BN
Others %OB %OO %ON
None %NB %NO %NN
%BB % of respondents that bought B and will continue buying B
%OB % of respondents that bought O other brands and will change to B
%NB % of respondents N that didn ́t bought and will start buying B
%...
It should be noted that, as mentioned above, this process is applied either in the
"trademark being evaluated" scenario or in the "alternative trademark" scenario, so
that, in the end, it will allow the estimation of the respective cash flows:
Of course, the difference between the two cash-flows will correspond to the
contribution of the trademark being evaluated.
It will be clear that the financial value of the trademark being evaluated (FVTM) will
correspond to the present value (PV) of its contribution to the cash flow of its owner,
that is, the current value of the differential values between those two cash flows:
5. Risk influence
In order to calculate the present value of this cash-flow differential, it is essential to
determine its adequate discount rate, the value of which will depend on the risk
attributed to the brand being evaluated.
In risk calculation, we propose an approach based exclusively on the market response,
that is, expunged from any intervention of experts. This means, first of all, that there is
no a priori identification of any parameters or risk indicators of the brand that can be
defined and measured or could be imposed on the respondents. On the contrary, the
respondents are asked to define the drivers they consider relevant in their purchase
decision process.
On the other hand, if there are no parameters or indicators defined by experts, there
are also no parameters or indicators evaluated by them. Once again, it is the
respondents who, having defined those drivers, will carry out their evaluations.
n-1 n n+1 n+2 n+3 n+4 n+5 annuity
CF with TM
CF without TM
response simulation
Stationary values of each
simulation
Cash-flows: with and without TM
In this process it is proposed the use of a compensatory model of the Fishbein type
(Fishbein, 1963 and 1967). Naturally, as described above, in the evaluation of a multi-
product brand the process is replicated for each of its products. In the first stage,
respondents are asked to identify the main drivers in the purchasing decision process
of a particular product. Then they have to evaluate the drivers (on a Likert or Osgood
scale) in terms of their importance in the purchasing decision process. In a second
phase, perhaps the most demanding task of the respondents, they are asked to
evaluate the brands they know according to each of the drivers. The output of the
process results in a table like the one presented:
In this context, in addition to the inventory of relevant drivers in the purchasing
decision process of the product and the importance of each of them in this process, we
have each of the brands evaluated driver to driver and globally, and finally the overall
average evaluation of the brands.
Assuming that a brand with an overall evaluation equal to the average of the overall
evaluations of the various brands means that the brand does not increase or decrease
the average risk of the total assets invested in that product industry. So it can be
concluded that the brand will have a risk equal to that industry risk.
Thinking in terms of the CAPM model (Capital Asset Pricing Model, see Sharpe, 1964)
for determining the WACC (Weighted Average Cost of Capital), it can be concluded
that the risk (β) of this brand will be equal to the risk (β) of the industry where it is
inserted. Accordingly, a mark with a global assessment above the average should
present a lower risk than the industry β and vice versa.
The risk of each of the marks will then be ascertained in the following way:
The division of the global average evaluation (Saverage) by the global evaluation of each
brand (SB2,...)will result in a risk multiplier of the industry for each brand. Thus, a brand
that presents a global evaluation above the average will have a risk multiplier of less
than 1 (one) and, consequently, a lower risk than the one of the industry:
Conversely, a brand that presents a global evaluation below the average will have a
risk multiplier of more than 1 (one) and, therefore, a higher risk than the industry.
Determining the risk β of the brand and using the CAPM model we get the discount
rate of the cash flow differential (ib) attributable to brand:
Discount rate (associated to Brand B) = ib = RS + βB * (Rm - RS)
RS = risk-free rate
Rm = return on market portfolio
(Rm - RS) = market risk premium
p B B2 B3 B4 B5
SB SB2 SB3 SB4 SB5 Smean
Mβ
B Mβ
B2 Mβ
B3 Mβ
B4 Mβ
B5
Mβ
B2 , ...risk multiplier of industry β for brand B2 = Smean /SB2
6. Financial value of the brand
Finally, with the two fundamental elements – trademark influence and risk influence –
determined, we are capable of calculating the financial value of the trademark:
7. Conclusion
It was assumed as a guiding principle of the method the primacy of the affective and
behavioral response of the market in the evaluation process. Recognizing that the role
of the experts may in some situations be of great utility and therefore should not be
diabolized, it is however considered that values such as reliability, independence and
credibility of the results overlap, and as such the method is enriched with the
minimization of role of those. The behavioral response, on one hand, allows the
estimation of two predictive cash-flows – with and without trademark (TM) – and,
consequently, the identification of the incremental cash-flow that will result from the
influence of TM. The affective response, on the other hand, allows the estimation of
the risk of TM and, consequently, of the discount rate of this cash flow.
Strengths
The choice of a method mainly based on the response of the stakeholders directly
responsible for the generation of the brand's cash-ins and cash-outs is at the origin of
what we can consider its main strengths, namely:Objectivity, both in the identification and in the evaluation of the indicators that
parameterize the measurement of the influences (1) of the trademark and (2) of the
risk in the generation of future cash-flows.Simplicity with regard to interaction with respondents (questionnaire):
understandable issues, without any technical requirements and easy response.Internalization of the anticipated cash-flow of the entity that owns the brand,
contrary to what happens in the best known and used methods, where this cash-flow
is exogenous to the method and made available by top management; in the event of
any strategic decision taken or to be taken by it - e.g.: internationalization of the brand
for a new market, launch of a new branded product, etc. – it must be considered since,
of course, it can materially influence the cash flow forecast.
Weaknesses
Of course, as in any other, it is possible to identify weaknesses in the proposed
method. The lack of conceptual consensus on some of the themes dealt with here – on
the concept of the brand itself – and the illiteracy of the majority of people about
them, are factors of constraint, hindering and limiting the application of the method. In
addition to this problem – inherent to a stakeholders based valuation – the following
difficulties are also noted in the application of the proposed method:
In Markovian simulation the stabilization of chain values can take place over an
extended time horizon. In these situations, when we perceive the approximate values
for which the steady vector will tend, these values will be used as proxy, possibly with
some correction by defect or by excess according to the trend of evolution.The Fishbein model used to determine brand preference and risk – the most
demanding task asked of respondents – has to be limited in columns and lines
otherwise the respondents' task is even more unpleasant and lengthy. In this sense, it
is recommended to limit the number of drivers (to the five considered by the inquirers
as more relevant) and also the number of brands. Of course, in heavily pulverized
markets this aspect is a constraint, since there may be a need for many brands in order
to obtain a reasonable market representability. This need would consequently call into
question the association of the average overall evaluation score with the risk (β) of the
industry; in these cases, depending on the specific situations, some correction /
adjustment of this average will have to be made.In the question "core" of the questionnaire "If all signs of brand identity change ...
would you change your buying behavior?" it is natural that the respondents raise some
doubts, namely "... and everything else would be the same? Product quality, number
and location of stores, after-sales service, etc.?” In these situations, the respondents
are asked to respond with all the doubts they have, that is, basically, with the doubts
they would have if they were confronted with this situation in reality. These doubts
will exactly correspond to the mistrust that the change of the signs provokes which,
natural and proven, will be all the greater the greater the preference for the altered
brand. (Delassus and Descostes, 2012).
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