The Hindu Business Line : What is a brand worth?

To the customer, who is one of the two major beneficiaries from their very existence, brands are a sign of trustworthiness, an insurance, for which she is willing to pay a premium over the equivalent generic product or no-name brand.

For the same reason, seen from the other side of the telescope, so to speak, brands yield tangible value to the owner-manufacturer. True, the value of the brand is realised in full only when the company puts it on the block or the corporate entity is itself acquired by another.

One can appreciate the truth of this if one considers what benefit Unilever in India would have received from the plant and machinery and distribution system of Tata Oil Mills which they took over some years ago, if they had not had the use of the Hamam name and all its associations going back over 80 years. They would have only acquired more capacity, but nowhere near the same level of potential for profits, market share or growth.

Similarly, the Coca-Cola Company entered India by paying for the well-trodden route to the hearts of the consumer that the brands like Thums Up signified. So much so that to this day, the parent brand although a worldwide favourite has not managed to replace the locally grown soft drink name.

Much bigger and weightier examples can be taken from a number of international cases, which have become frequent and common in the era of furious realignments of company portfolios and M&A activity. If we break it down, however, the constituents of a brand's benefits to the company are the special assets that come with it: the numerous loyal consumers, the channels of distribution, the access to suppliers and other specialists, the good will, the price premium commanded by its consistent performance over the years and of course the intangible something called the image.

How exactly, given all this, one goes about fixing a price tag on the brand is a complex issue. Some methods can be used to approximate the ideal target number in rupees or dollars; one of them is the current market value of those tangible assets for which there is a market or comparable entity. Another way is to see what it would have cost to build such an asset oneself if one started afresh now.

A third method is to look at the premium per unit that the consumer is willing to pay, over and above a no-name brand in the same category, and extrapolate it to the total volume of the brand.

Any reliable profit projections for the brand can also be used. This applies to the capital asset pricing model, as with any financial assets, to estimate the present value of the stream of cash flows over a number of years, discounted in the normal manner.

The choice of the number of years is as always a matter of judgement. Equally, an earnings multiple — of the projected annual contribution from the brand to the company's profits — can also be worked out.

The best recommended method can never be one formula, but rather a mix of many, using the various estimates along with experience and consensus of executive judgement to arrive at a final number.

Of course then the financial and legal experts would take over and take the deal forward.

The key point to realise is that the benefit to either party is the embedded or accumulated value resulting from a number of years in the market place and it has a real and tangible cost that would otherwise have been paid in order to build a new brand from scratch.

Only those who have tried this task in a competitive market would know how difficult this could be.