Brand building, encompassing activities such as social media engagement, crafting compelling business narratives, creating mascots, and developing catchy taglines, is a crucial aspect of marketing.
However, a common question often arises:
- How can we quantify the value of brand building?
- Is there a tangible figure, and if so, how is it calculated?
While I am not an expert in mergers and acquisitions or finance, I recently chaced upon a document on International Financial Reporting Standard 3 (IFRS 3) that provided enlightening insights into this matter.
I am eager to share these findings with you.
Definition of Asset
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
Definition of Intangible Asset
In addition, an intangible asset other than goodwill is defined as “an identifiable non-monetary asset without physical substance”
What are marketing-related assets?
Examples of identifiable assets acquired in a business combination (Extract from IFRS 3.IE16-44)
These are things that a company owns that you can’t touch or see, but they are still valuable because they help the company sell its products or services.
They include things like trademarks, internet domain names, websites, and agreements not to compete with other businesses.
Trademarks, service marks, and related items:
These are special symbols, words, or names that a company uses to identify itself and its products or services. They are important because they help customers recognize the company and distinguish it from its competitors. For example, the golden arches symbol is a trademark of McDonald’s, and the name “Coca-Cola” is a trademark of the Coca-Cola Company.
A trademark can help a company in two main ways:
- It can help increase the amount of products or services the company sells. This is because customers who recognize and trust the trademark may be more likely to buy the product or service.
- It can also allow the company to charge higher prices for its products or services. This is because customers may be willing to pay more for a product or service from a company they recognize and trust. For example, a pair of sneakers with the Nike “swoosh” logo might sell for more than a similar pair of sneakers without a recognizable brand name.
Characteristics that affect the fair value of a trademark:
- how long the trademark has been actively used in marketing • type of market (eg consumer markets, B2B, etc)
- how widely the acquired entity uses the trademark (specific service lines, all products and services or in specific geographical areas)
- whether the entity uses a number of interchangeable trademarks to market similar products to different customers
- legislation covered by similar trademarks and the related names, symbols etc • whether the trademark is also used to represent the acquired entity as a whole
- the extent that the entity’s marketing is dependent on the use of trademarks or if other factors, such as core technology, are advertised to customers and make the trademark less relevant.
The MEEM (Multi-period earnings excess method) and CIDM Comparative income differential method) are also used to find the value of intangible assets like a brand.
Use of these methods should be considered especially when trademarks and related marketing intangible assets are very significant for the acquired business.
The CIDM and MEEM both involve a more detailed examination of the asset in question and might therefore provide a more reliable estimate of fair value.
Risk profile of intangible assets
A couple of examples:
- Microsoft paid around $2.15 billion for Marketing-related (trade name or brand) for LinkedIn which it acquired for $27 billion.
- When the Indian automaker Tata Motors acquired Jaguar Land Rover from Ford in 2008, they paid $2.56 billion only for the brand, which valued more than the factories, the raw materials and all the employees.
The Power and Worth of Branding in Business
The value of brand building and marketing-related intangible assets is undeniable. They are the invisible forces that drive customer recognition, trust, and ultimately, sales and profitability.
While quantifying these assets can be complex, standards like IFRS 3 provide a framework for understanding and calculating their value.
As we’ve seen in the examples of Microsoft’s acquisition of LinkedIn and Tata Motors’ acquisition of Jaguar Land Rover, the value of a strong brand can be immense.
So, whether you’re a business owner, a marketer, or an investor, it’s essential to recognize the power of branding and the significant financial value it can bring. Remember, while these assets may be intangible, their impact on a company’s bottom line is very real.
I hope this article has provided a deeper understanding of the importance of marketing-related intangible assets and their role in business success.
Sources:
https://www.microsoft.com/investor/reports/ar17/index.html#
https://www.grantthornton.global/globalassets/1.-member-firms/global/insights/article-pdfs/2013/intangible-assets-in-a-business-combination-nov-2013.pdf
https://www.linkedin.com/pulse/how-value-your-brand-roy-brockman/?trk=mp-reader-card
