Intellectual Property Conference

ISO 10668 (Brand Value) – Innovation in Practice

Monday 24th October 2011

Simon Murrison

Twitter @simonmurrison

The Firm - Our Philosophy

Our client base consists predominantly of owner managed businesses with challenging demands and changing requirements. We are committed to providing all our clients with the best professional and commercial services.

@simonmurrison

About me!

Qualified as CA in 1997

Joined a 3 partner firm in 1999 & became partner in 2005

Joined a multi-national firm in 2009 as partner

Returned to smaller sized firm in Jan 2011

Entire career spent dealing with start up to medium sized entities

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Brand Valuation – set the scene

What are Intangibles?

Easier to explain in context of tangibles – ‘Tangible assets would consist of exclusively of assets with a physical substance capable of being touched and intangible assets would comprise solely incorporeal rights.

Non-financial fixed assets that do not have physical substance but are identifiable and controlled by the entity through custody or legal rights.

Examples would include goodwill, patents, brands and trademarks. Deferred expenditure such as research and development costs are also

considered an intangible asset.

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Brand Valuation – set the scene

Traditional Accounting Treatment for Intangibles?

Purchased goodwill - usually the difference between the purchase price and the book value of the assets.

Will be appear in the Balance Sheet as an asset and then amortised (written off) over 20 years or useful life.

Should not be shown at a value greater than its recoverable amount – Impairment Reviews required.

Internally generated goodwill – will not be recognised on the company’s Balance Sheet.

Internally developed intangible assets should be capitalised only where they have a readily ascertainable market.

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Brand Valuation – set the scene

Readily Ascertainable Market -

HMRC guidance –

The assets belongs to a population of assets that are equivalent in all material aspects, and An active market, evidenced by frequent transactions, exists for that population of assets.

Example would be milk quota held by a farming company. Same rules apply to brands

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Brand Valuation – General requirements

Transparency – include disclosure and quantification of valuation inputs, assumptions & risks

Validity – based on valid and relevant inputs and assumptions as of the value date

Reliability – if repeated give comparable & reconcilable result Sufficiency – based on sufficient date and analysis to form a

reliable conclusion Objectivity – appraiser be free from any form of biased judgement Need to consider financial, behavioural and legal parameters

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Brand Valuation – Specific requirements

Declaration of purpose

Intended use Addressed audiences The identified asset The premise of value The position of the appraiser The valuation date The value date

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Brand Valuation – Specific requirements

Potential purposes of valuation

Management information Strategic Planning Value Reporting Accounting Liquidation Legal Transaction Licensing Litigation support / dispute resolution

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Brand Valuation – Specific requirements

Value concept

Monetary value of a brand shall represent the economic benefit conferred by the brand over its useful economic life.

Identification of brand

The appraisal shall identify, define and describe the brand subject to valuation

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Brand Valuation – Methods

3 Methods currently being used

Income Approach Market Approach Cost Approach

Value concept & characteristics of the brand will dictate which approach is used

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Brand Valuation – Income Approach

Measures the value of the brand by reference to the present value of the economic benefits expected to be received over the remaining useful economic life of the brand.

Estimating the expected after-tax cash flow streams attributable to the asset over its remaining economic life, and converting these after-tax cash streams to present value through discounting with an appropriate discount rate

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Brand Valuation – Income Approach

Cash flow methods –

Price Premium Method – estimate the value of a brand by reference to the price premium it creates.

Volume Premium Method – estimate the value of a brand by reference t the volume premium that it generates.

Income-split Method – value the brand as the present value of the portion of economic profit attributable to the brand.

Multi-period Excess Earnings Method – present value of the future residual cash flow after deducting returns for all other assets required to operate the business.

Incremental Cash Flow Method – the cash flow generated by a brand in a business through comparison with a comparable business with no such brand.

Royalty Relief Method – present value of expected future royalty payments assuming that the brand is not owned but licensed.

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Brand Valuation – Income Approach

Financial Variables –

Discount rate applied Useful economic life. Tax rate – cash flow is ‘after tax’.

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Brand Valuation – Market Approach

Measures value based on what other purchasers in the market have paid for assets that can be considered reasonably similar to those being valued.

The application of market approach shall result in an estimate of the price reasonably expected to be realised if the brand were to be sold.

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Brand Valuation – Market Approach

Considerations –

Needs to be comparable Brand strengths Goods and services similar Economic and legal situation Closeness in time to transaction Independent parties involved Similar strategic values & synergies

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Brand Valuation – Cost Approach

Measures the value of a brand based on the cost invested in building the brand, or its replacement or reproduction cost.

The actual cost invested in the brand shall encompass all costs spent on building and protecting the brand up to the value date.

The cost to replace the brand shall include the cost of constructing a similar brand of equivalent utility at prices applicable at the time of the valuation analysis.

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Brand Valuation – necessary valuation

inputs Market & financial data Brand situation Brand strength Effect on demand Legal

Protection Rights to the Brand Ownership

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Brand Valuation – Examples

To follow after coffee break

Final thought – Remember internal figures can only be used on the balance sheet if readily

ascertainable market available

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Over to Ken & Nat after coffee .....

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Email – simon@gillilandca.com

Tel - 0141 226 8484

Linkedin – Simon Murrison

Twitter - @simonmurrison

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