Are You Acquiring a Brand? This Is The Secret Formula to Calculating Its Real-Dollar Value If you're looking to quantify the value of a brand before an acquisition, read these tips to determine the value of a brand and its equity in real dollar terms.
By Matt Bertram Edited by Kara McIntyre
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Measuring brand value and equity is similar to shopping for a home as an investor. While many home valuations are based on intangibles like square footage, the number of rooms and the home's condition, there are also a lot of intangible factors, such as style, architecture and a certain je ne sais quoi that are more subjective than objective in value.
If you're a business looking to acquire another brand in your portfolio and struggling to calculate its valuation, I've outlined a few points to help you calculate the value of a brand based on its quantitative and qualitative metrics.
Related: The Key Metrics in Building a Brand Worth Acquiring
What are brand value and brand equity?
Before a merger, it's vital to differentiate between brand value and brand equity when assessing total value. Brand value is the financial or market value of a brand and all of its assets. On the other hand, brand equity measures consumer sentiment and awareness of a specific brand.
Differentiating between these two metrics will help you decide how much you are willing to pay for a brand. For example, suppose you were looking to acquire a recently expanded boutique with a dominant presence in the Dallas market. In that case, their market valuation may be lower because it has a high current ratio (e.g., more debt than it could pay off at the present moment). However, if you conducted a customer survey and found that almost all of its customers were satisfied and excited to shop with the brand, you would conclude that its equity is worth more than its current market value.
Ultimately, calculating brand value and equity will provide a baseline for what you and other competitors would be willing to pay for a brand. In competitive markets, understanding present and future value will help you make a competitive bid that will satisfy both parties involved.
In addition, calculating brand value can help in several financial aspects, including:
- Using a brand's value as collateral for a loan
- Understanding its tax evaluation
- Tracking its financial performance
- Understand areas of weakness the brand can improve in
With this in mind, let's explore how to calculate the value of a brand using traditional financial metrics and then quantify the quality of a brand's equity using some of these same ideas.
Related: When Acquiring a Company, Don't Forget About the People
A quantitative approach to brand value
To begin with our valuation, we can take a few different approaches to calculate a brand's financial value.
- Market valuation: The total value of a brand's assets, profit margin, capital structure, debt, stock price, or the comparable market value of other brands sold.
- Income valuation: The estimated value of income that would result from purchasing this asset (i.e rate of return over X years)
- Cost valuation: The total value of costs required to build a brand to its current valuation (e.g. raw materials consumed, marketing spend, labor costs over time)
Market valuation is similar to pricing a home, while income valuation would be similar to assessing the total profit of a rental property or passive-income instrument. On the other hand, cost evaluation provides a good estimate of the rate of return of all previous marketing and business efforts to scale a brand to its current value.
By combining these estimates with qualitative metrics like consumer loyalty, we can gain a good idea of the total value of a brand and whether or not it will be a profitable investment.
Related: 7 Steps to Prepare Your Company for an Acquisition
A qualitative approach to brand equity
While calculating brand equity is mostly subjective, we can get rough scale estimates by assigning value to things like CLV, customer sentiment and brand awareness to quantify the total value of a brand's equity.
Here are just a few examples of calculating brand equity in dollar value.
- Customer lifetime value (CLV): Assign a value to a customer and then multiply this by the number of transactions and their average length of retention. CLV quantifies the long-term value of a brand.
- Marketing ROI and brand awareness: Assign a value to each customer reached based on CLV and calculate the number of conversions for each impression against the cost spent for those total impressions.
- Customer sentiment: Conduct customer surveys and invest in social media monitoring tools to assess how satisfied customers are with a brand. To quantify, you can score customers in a survey (0-10) on how willing they are to shop with the brand again, recommend it to friends or family and whether they would spend more or less on future purchases. Then, assign a value to each score to get a rough estimate of the value of total consumer sentiment.
While customer sentiment and loyalty could be more difficult to evaluate, they also provide a pretty good idea of how much money your most loyal customers provide to a business. Taking a basic Pareto approach, most specialized businesses receive about 80% of their revenue from about 20% of their total customer base.
Overall, brand equity is more a determinant of long-term brand value than short-term profitability.
With these metrics in mind, you can create a financial overview of the total value of a business and its brand equity to determine whether its future valuation justifies its current purchasing price.
While businesses could easily improve a brand's reputation over time and opt for a lower-priced brand, your business will ultimately benefit more from purchasing a brand with a strong and loyal local presence that requires very little maintenance or costs to keep profitable.
