What is the interbrands methodology

Current brand valuation methods and their relation to reality

Table of Contents

I. Introduction

II. The valuation of intangible assets

III. The mark
1. The versatility of the brand term
2. Use of a realistic brand value calculation

IV. Different approaches to brand valuation
1. Valuation methods according to HGB, IAS
2. Finance-oriented methods
3. Price premium measurement
4. Behavioral approaches

V. Comparison of current valuation methods
1. Interbrand’s Valuation Methodology
a. Financial Analysis
b. Role of Brand
c. Brand Strength
d. The overall calculation
2. The B.R. Brand rating model as an alternative method
a. ICON iceberg index
b. Discounted price difference
c. Brand Future Score
d. The overall calculation

VI. The significance of the holistic evaluation models
1. Selection of criteria
2. Examination of the different models
a. objectivity
b. Holism
c. independence

VII. Conclusion and outlook

VIII. Appendix

IX. Bibliography

X. Reflection on the collaboration with Ryan Bertoldi

I. Introduction:

On January 23, 2012 the time had come: the registered businessman Anton Schlecker had to file an application for the opening of insolvency proceedings. A shock for the 23,500 employees who had to be recruited on the job market. (See Süddeutsche Zeitung, December 28, 2012). But what was the reason for this bankruptcy?

On January 21, 2012, the Süddeutsche Zeitung titled the decline of the Schlecker empire “When people and image are irrelevant”. Since 2008, the company has increasingly lost market share to the competition. The Schlecker branches were unprofitable, unpopular and looked unfriendly at the same time. It was above all the “Schlecker” brand, which suffered after an extensive public debate about the poor working conditions and which, according to the opinion research institute YouGov, fell sharply in value (cf. Wirtschaftswoche, January 24, 2012 and Handelsblatt, March 27, 2013).

You can tell that the image of a brand can drive entire corporations into bankruptcy; or brands such as Coca-Cola can be so deeply anchored in the minds of consumers that it is natural for consumers to buy these products. For this reason, companies should regularly check what added value a brand represents and how it can be increased.

Several research institutes, consulting and auditing companies have developed evaluation methods to find out how much a brand like Coca-Cola or Schlecker is worth. I would like to discuss the most relevant methods below in order to be able to assess the extent to which current valuation approaches can represent a realistic brand value?

Structure and research question of the work

Within the scope of this thesis, the question of whether the current valuation approaches can represent a realistic brand value should be investigated. Since these are scoring models, only relative values ​​are always determined. I would like to find out whether these represent a certain "closeness to reality" using criteria that I have defined myself. To do this, however, first of all the balance sheet classification of the brand value must be presented, different valuation approaches must be defined and the two most relevant models presented.

II. The valuation of intangible assets

Should be a due diligence1 are carried out, not only the balance sheet values ​​have to be included and possibly adjusted appropriately, but also other, intangible values. The intangible value is usually visible in the long term and can only be capitalized on the balance sheet when a company is sold. To determine the exact amount, you have to calculate the difference between the equity reported on the balance sheet and the purchase price of the company. The hidden reserves that can be capitalized are then deducted and the business value (goodwill) is obtained, which represents the intangible assets in the company. (Ballwieser, 2007, pp. 1-3; cf. Matschke, 2003, pp.)

In 1999 the OECD divided intangible assets into several categories. On the one hand there is intellectual capital2, which represents the skills "knowledge, information, experience - basically everything that can be used to generate wealth and values" (Steward, 1997, p. 19), to utilize them (cf. OECD, 1999).

Another category is structured capital, also known as internal capital (see Journal of Finance and Accounting, 2009, p. 2). ICM-Gathering, an amalgamation of several pioneering companies, also describes structural capital as “codified knowledge”, which is available, for example, in the form of patents, processes and certain structures (cf. ICM-Gathering, 2012).

There is also another category, external capital, which primarily represents the reputation, reputation and thus the brand value of a company. This category must be clearly distinguished from intellectual and structural capital, since these are external relationships (cf. Petty / Guthrie, 2000, p.158).

Intangible assets "represent resources that bring a competitive advantage for every company" (Rothenberger, 2006, p. 6) and for this reason are among the most important assets in a company. This can be seen especially in times of fast growing, highly innovative companies. The discrepancy between the balance sheet values ​​and the exchange rates is also increasing on the stock markets. This effect can be traced back to the growing importance of intangible assets. Nowadays it is becoming more and more difficult to realistically evaluate a company. Lack of transparency and the intangible values ​​that are difficult to quantify make a uniform, clearly defined assessment difficult. Above all, external capital is increasingly coming to the fore these days (Daum, 2003), as it is an important distinguishing feature from other products.

III. The brand as an asset

1. The versatility of the brand term

A brand can be viewed both from a technical-functional perspective and from a psychological perspective. Both approaches are important to determine brand equity. On the one hand, there is the legal basis for protecting one's own products and, on the other hand, the behavioral science approach also plays a role (Meffert, 2005, pp. 320-324). So "a brand [...] is an individual and protectable symbol" (Welling, 2003, No. 47) but also "... an unmistakable image firmly anchored in the psyche of the consumer ..." (Meffert, 2002, p.6 ). The brand offers, so to speak, protection against the competition, as you can better differentiate your product (Haedrich, 2003, p. 181). At the same time, it has an associative value that is anchored in people's memory structures. The term brand value can also be described as the “added value realized by the brand” (Brand Rating, 2008, Slide 3).

2. What are the benefits of a brand evaluation?

a. Historical background

After Nestlé took over Rowntree Mackintosh in 1988, the need for a realistic valuation method became increasingly debated among the general public. At that time, Nestlé paid around 4.5 billion dollars for the English confectionery manufacturer (New York Times, June 25, 1988). The price-to-book value ratio at the time was almost 5 and the price-earnings ratio was around 26 (Blacket, 1991). Since Rowntree is a traditional consumer goods manufacturer that enjoyed a very high reputation in the Anglo-American region, it is assumed that the goodwill was mainly due to the high brand value.

After an extensive “brand accounting debate” in Great Britain, the brand was retrospectively recognized in the balance sheet as an independent asset. The reputation of the brand within the company also increased in the period that followed. Nowadays it is even presented as "... the company's most important capital" (Kapferer, 1992, p. 9). According to a study by PriceWaterhouseCoopers, the brand value as a percentage of a company averages over 50%3. (PWC, February 21, 2012).

b. Reasons for a brand evaluation

The increasing need for brand valuation can also be explained on the basis of globalization and increasing competitive pressure. It represents an important differentiating factor. The conventional reasons for a brand equity analysis can be divided into two categories:

- External use: valuation methods for processing financial transactions such as mergers & acquisitions, licensing, tax issues, accounting issues (Interbrand, 2005, p. 2)
- Internal use: evaluation of the brand in order to draw conclusions and develop strategies in brand and personnel management (Interbrand, 2005, p.2)

In the last few years there has been a noticeable trend from external to internal areas of application of brand valuation. (Rothenberger, 2006)

IV. Different approaches to brand valuation

Even if the brand is generally viewed as a “lever for value creation” (Rothenberger, 2006, p. 47), one is faced with the fundamental problem that there is no uniform, recognized evaluation method for quantifying the brand value. For this reason, different approaches to brand valuation are presented below. These approaches form the basis of different assessment methods and must be taken into account in order to enable a critical discussion.

1. Valuation methods according to HGB and IFRS

In German accounting law, according to IFRS standards and US-GAAP, the authoritative ban on capitalization applies to self-created brands (§ 248 II HGB (2), IAS 38, ...). However, if an acquired brand is included in the portfolio, there is an obligation under the Commercial Code due to the requirement of completeness (§ 246 I HGB, § 248 II (2)). The brand is included undifferentiated in the goodwill and depreciated as planned, in the case of permanent impairment, unscheduled depreciation (§ 253 HGB (3)).

On the other hand, there are the legal provisions according to US-GAAP, which prohibit the scheduled depreciation of the brands in one's own account (FASB, Summary of Statement No. 142). The brand must be regularly checked for value.

According to IAS 9, there is a choice between the scheduled amortization of goodwill and the regular implementation of a so-called impairment test, which regularly checks the brand for impairment (see Important Commercial Laws, 2013, pp. 50-113).

In principle, in all three legal provisions, an increase in brand value is negligible in the balance sheet. Only in the case of an M&A transaction is the possible increase in value included in the valuation.

2. Finance-oriented methods

The cost-oriented valuation approaches are strongly based on the replacement values ​​and the historical costs of a brand. All costs that influence the brand value can be added to one. On the other hand, there is the possibility of quantifying costs and expenses for creating a new brand (cf. Esch, 2005, p.1281).

In the case of the profit-oriented methods, forecast models and estimates are used as the basis for brand value analysis, primarily in order to measure future market success. Here, for example, according to a model by Kern, an interest rate, royalty rate or net income is defined that can be traced back to the influence of the brand (cf. Kern, 1962, pp. 17-31). This is discounted to the current cash value and results in a brand value (Kapferer, 1992, pp. 304-305). This also includes the discounted cash flow method (DCF method), which is based on the free cash flows and thus represents possible financial returns due to the brand.

The capital market-oriented approaches assume that the difference between book value and share value represents the intangible assets and thus also the brand. Intangible assets are divided into structural capital (patents, processes, structures), brand value and intellectual capital (cf. Esch R., 2005, p.1283).

The price premium measurement measures the willingness of customers to pay a certain premium for a branded item. This difference is determined from the average test results and ultimately defines the brand value per piece. It is also possible to carry out a conjoint analysis and measure the overall preferences of the customers. These measurements can be used to determine the net effect of a brand on customers (cf. Kapferer, 1992, pp. 304-305). The price premium measurement is based on the benefit theory. This justifies the price difference through the appearance of the brand emblem. The higher sales price is due to the brand understanding, trust in the brand and product satisfaction (cf. Sommer, 1998, p.168-169).

3. Psychological, behavioral approaches

The psychological approach to brand valuation is not based on the economic value of a brand, but “... rather on the way in which this valuation is achieved, i. H. the understanding of the brand function, its development, its increase or loss in value ”(Kapferer, 1992, p. 291). This means that the behavioral science approach is based on brand awareness, perceived quality, and brand loyalty. One tries, so to speak, to measure the test persons' associations with the brand. (based on Esch F., 2005, p. 1270). The essential basis of the psychological approach is brand awareness and brand image. Both characteristics are anchored in our memory structures. Awareness is the basis of the brand image, as it requires further associations with the brand as a unique selling point (cf. Jost-Benz, 2009, pp. 24-25)

There are two ways to measure brand awareness:

The recall test checks the awareness of different brands through direct consumer surveys. After specifying a product range, the test person is asked to list the brands they are familiar with. (See Esch, 2005, p. 1274)

On the other hand, the recognized person tries to check passive brand awareness: a test person is presented with a list of different brands and they then name the brands they are familiar with. (See Esch, 2005, p. 1275)

The assessment of a brand's image can be carried out using a qualitative survey. For example, the product properties of the brand are asked for here. (Cf. Esch, 2005, p. 1275) This method is particularly useful in brand management, as the results can be used to review and improve the brand strategy. (...)

4. Combined brand valuation approaches as a solution to several partial models

The starting points of different evaluation models are based on different assumptions. The cost-oriented approach is based only on past values, but not on future profits that the brand could generate in the future. The profit-oriented approach, on the other hand, is based only on future-oriented estimates and neglects any costs from the past. The behavioral science approaches can determine the awareness and image of a brand in several test subjects, but quantification is not possible. (based on Haedrick, 2003, pp. 186-189)

5. Critical appreciation of the different approaches

Since the brand represents both an associative value and a real protective value in the mind of the consumer, only the holistic evaluation models should be discussed below. The background to this approach is the need for a quantifiable brand value for future accounting, licensing and M&A transactions.

V. Current holistic evaluation methods in comparison

In order to combine these starting points of the brand value analysis, several mixing methods were developed. Two of the best-known but also very different evaluation models are the Brand Valuation Model from Interbrand and the Brand Rating Model from B.R. Rating.

1. The Brand Valuation Model

In 1989, the brand consultancy INTERBRAND developed the Brand Valuation Model and has been publishing the brand values ​​of the hundred most valuable brands every year since 2006. The aim of this evaluation model is all stakeholders4 equally included in the assessment. In this way, both current and future consumers, investors and brand strategy departments should be able to benefit from the valuation method. The evaluation approach is also kept holistic and tries to combine financial aspects, future profit forecasts (finance-oriented approaches) but also behavioral aspects (based on Bentele, 2009, p. 125).

Interbrand's scoring model consists of several levels. First, a segmentation is carried out: The different brands are divided up depending on the country, since the perception of a brand can vary greatly depending on the business area and country. An example of a segmentation can be found in Appendix 1 (cf. Interbrand, 2012, pp. 4-6).

a. The financial analysis

Depending on the business area and country, the clearly separated area is analyzed for profit-oriented measures.The first step is to determine the after-tax profit for a product. The Weighted Average Costs (WACC) are then deducted, as the capital brought in is not part of the brand's value creation process. The remaining amount represents the economic value added (EVA) of the brand, which is defined for the next five years. Interbrand would like to include the future profits of the brand (cf. Interbrand, 2005, pp. 4-6).

b. Determining the Role of Brand Index

As a result, further intangible assets must now be deducted from the economic value added in order to be able to represent the added value of the brand in isolation. Several demand factors such as price, quality and personal associations with the brand must be treated separately. The exact conversion of these factors to the percentage that the brand represents (Role of Brand Index) is not disclosed by Interbrand. The result of such an analysis can be found in Appendix 2 (cf. Interbrand, 2005, p.6)

c. The Brand Strength Score

Since the brand is also subject to a certain market risk, Interbrand calculates the strength of the brand compared to the competition. The company concentrates on seven differentiable main categories with a total of 80 to 100 different sub-categories. (Meffert, 2005, brand management, p.331). The seven main categories and their most important aspects can be found in Appendix 3.

In order to measure the earnings risk, the market strength is transformed into a discount rate and included in the calculation. The general brand risk (x-axis) and brand strength (y-axis) are inserted into an S-shaped transformation curve. In this way, a discount rate is determined which ultimately summarizes the brand risk and brand strength (e.g. Appendix 4). The result ultimately depends on the competitive strength: a strong brand only has a risk that is customary in the market (e.g. federal bonds). The average brand has the risk of the average WACC. On the other hand, a risk premium is factored into a weak brand (Interbrand, 2006, p. 11).

d. The total calculation of the brand value

After performing the financial analysis, the brand's EVA is multiplied by the percentage of the Brand Valuation Index. This is used to clean up other intangible assets such as intellectual or structured capital. The discount rate is included in the calculation in order to show the possible risk (cf. Interbrand, 2006, p.12).

Calculation example (simplified):

Figure not included in this excerpt

A detailed sample calculation can be found in Appendix 5. In order to understand the effort for this calculation, you should note that you have to determine a brand value for each brand for each segment.

2. The brand rating model as an alternative method

The 2001 by B.R. Brand Rating is known as the 3-component model. It is made up of the following calculation bases:

a. The ICON iceberg index

The reference point for this method is the ICON iceberg index, a behavior-oriented evaluation method that represents brand strength. The iceberg index consists of two parts: The brand iconography measures the uniqueness, communication, size, clarity and attractiveness of the brand. The brand credit is intended to measure sympathy, loyalty and trust in the brand. The brand iconography figuratively represents the visible half of the iceberg while the brand credit represents the subliminal, invisible part of the iceberg (see Appendix 6) (cf. B. R. Rating, 2008, Slide 8).

b. The discounted price gap

The second component of the brand rating model is the discounted price difference: This is first determined through customer surveys and then compared with the realistic price difference. The following calculation basis applies:

Figure not included in this excerpt

The discount factor represents the future risk in the market. This means the past values ​​are discounted (cf. Bentele, 2009, pp. 118-120).

c. The brand future score

The third component is the Brand Future Sc, which represents the future potential or the expected lifespan of the brand. There the development trends, the expansion potential and the brand protection factor are calculated using a scoring model and shown in percentages. (See Bentele, 2009, pp. 118-120)

In the overall calculation, all three factors are multiplied together (cf. Bentele, 2009, p. 118).

The prices as well as the sales volume are calculated retrospectively on the average values ​​of the last 3 years. Additional information on this calculation can be found in Appendix 7.

VI. The significance of the holistic assessment methods

1. Selection of criteria

The aim of this chapter is to enable a critical examination and comparison of these two holistic brand evaluation methods. In doing so, the valuation risks should be assessed, taking into account the objectivity, the holistic nature and the independence of the methods. In order to ultimately be able to evaluate the three methods, the following three criteria were defined:

- The objectivities of evaluation methods: What influence do subjective influences have on these evaluation methods?
- Holistic nature of the methods: To what extent are both the financially oriented and psychological procedures included?
- Independence of the criteria: To what extent can interdependencies influence the brand value?

2. Examination of the models

a. The objectivity

If one wants to take into account the objectivity of the valuation models, one should distinguish between psychological and financial factors. Basically, a psychological factor is more subject to a subjective assessment than a number-based part.

If one now looks at the Interbrand model, the Role of Brand Index flows into the EVA of the brand in order to represent the brand in isolation. There is a risk of a misjudgment here, as on the one hand the EVA is based on future values ​​and on the other hand the Role of Brand Index could have falsified the figures.

The Interbrand model, for example, is heavily dependent on the external influences of the evaluators.

The brand rating model relates to sales figures and price premium measurements over the past three years. Since these are historical values, an objective assessment can be guaranteed (based on Bentele, 2009, pp. 118-120). It remains to be seen whether the ICON iceberg index can ultimately represent a realistic scoring model. In principle, however, the past values ​​(B.R. Rating) should represent a more objective basis than the future values ​​(Interbrand). Therefore, according to this criterion, the B.R. Rating are preferred, also because the price premium measurement can establish a direct reference to the brand without first having to isolate the brand.

b. The wholeness

While Interbrand's model focuses on the brand's future earnings, B.R. Rating on the price premium measurement and discounted this result with the expected risk (brand future score). Since the past values ​​only refer to the sales volume and the price difference, imputed costs (WACC) but also other real costs and thus also the company's balance sheet income are not taken into account (cf. Bentele, 2009, pp. 118-120, 125) .

The Interbrand model represents a balanced model here.

c. independence

Even if Interbrand is a more complete method, there is a risk of a high correlation between the criteria. If one compares the criteria of the Role of Brand Index and the competitive strength of the brand, a certain similarity can be seen. The goal of the Role of Brand Index is to define the brand's economic value added, while the competitive strength represents the brand's strength. However, both approaches are based on behavioral approaches that are difficult to differentiate.

The B.R. Rating tries to present the current brand strength using the ICON iceberg index, the price premium measurement and the brand future score. Here, too, certain overlaps are likely, even if the brand future score (future

Risk) and the ICON iceberg index (current brand strength) refer to different time factors (Bentele, 2009, pp. 118-120).

VII. Conclusion and outlook

The two valuation methods presented by Interbrand and B.R. Ratings try to attribute a monetary value to a brand, which is fundamentally anchored in the minds of consumers. This is also the biggest problem, since these values ​​are subject to subjective assessments and cannot be measured one hundred percent. Conjoint analyzes, recall tests and recognition tests cannot create quantitative values ​​either.

Because of this, one tries to create a relative brand value using scoring models. Only the model from B.R. Rating can use the price premium model to create a direct relationship between an unbranded and a labeled branded product and also quantify this. For these reasons, the

Brand Valuation Approach by B.R. Rating most likely a realistic brand valuation method. In addition, the approach of B.R. Rating also to the simpler, more transparent methods.

Since the various standard-issuers (Interbrand and B.R. Rating) are not prepared to disclose the exact criteria of their evaluation methods, it is difficult to carry out an analysis based on the defined criteria. Here you can only rely on the finance-oriented approaches.

In the future, however, there will be an increasing search for a uniform and realistic valuation model, since the accounting principles according to IFRS as well as US GAAP already prescribe a simplified brand valuation test (impairment test), but this will not be sufficient in the long term.

According to the German Commercial Code, however, most valuation models would be difficult to enforce, as the principle of prudence prohibits accounting for future income and this is incorporated into almost all relevant brand valuation methods.

It remains questionable whether these brand valuation models would have helped an entrepreneur like Anton Schlecker. Also because the brand's image can vary greatly and quickly, Mr Schlecker might not have had a chance to react in time.

VIII. Appendix

Appendix 1: The segmentation (Interbrand’s Valuation Methodology)

Figure not included in this excerpt

Source: Interbrand, The brand evaluation of Interbrand, 2005, p.6

Appendix 2: Role of Brand Index (Interbrand’s Valuation Methodology)

Figure not included in this excerpt

Source: Interbrand, 2005, “The brand valuation of Interbrand”, p.8

Appendix 3: The Competitive Strength (Interbrand’s Valuation Methodology)

Figure not included in this excerpt

Source: Own illustration based on Meffert H., 2005, p.331 and Interbrand, 2006, p.10)

Appendix 4: Brand Stregth Score (BSS), determination of the discount rate (Interbrand’s Valuation Methodology)

Figure not included in this excerpt

Source: Interbrand, 2006, p.11

Appendix 5: Overall calculation (Interbrand’s Valuation Methodology)

Figure not included in this excerpt

Source: Interbrand, 2006, p.12

Appendix 6: The ICON Iceberg Index (Brand Rating Model)

Figure not included in this excerpt

Source: B. R. Rating, 2008, slide 8

Appendix 7: The influences of the 3-component model on the overall calculation (B.R. Rating)

Figure not included in this excerpt

Source: B.R. Brand Rating, 2008, slide 5

IX. bibliography

1. Book index:

- Ballwieser W., 2007, company valuation process, methods and problems
- Bentele G., Buchele M., Hoepfner J., Liebert T., “Brand value and brand value determination - A systematic model investigation and evaluation, 3rd edition 2009
- Blacket T., 1991, The Nature of Brands
- Esch F., 2005, Modern Brand Management
- Haedrich G., 2003, Strategic Brand Management
- Haedrick G., Tomczak T., Kaetzke P., 2003, Strategic Brand Management
- Jost-B, 2009, Identity-Based Brand Valuation
- Journal of Finance and Accounting, Intellectual Capital and Valuation, 2009, p. 2, Url: http://www.aabri.com/manuscripts/09177.pdf
- Kapferer J., 1992, The brand - capital of the company
- Kapferer J., 1992, The brand
- Kern W., 1962, Evaluation of Trademarks
- Matschke J., 2003, principle of proper company valuation)
- Meffert H., Burmann C., Koers M., 2005, brand management
- Meffert H., Burmann, Koers, 2002, importance and subject of brand management,
- Petty / Guthr, 2000, Intellectual Capital literature review
- Rothenberger, Matzler, Hinterhuber, Renzl, 2006, Intangible Assets - Handbook of intangible assets
- Rothenberger S., 2006, Intangible Assets
- Important Economic Laws, 2013, 26th edition
- Sommer R., 1998, Brand Psychology
- Steward, 1997, The Wealth of Organizations
- Welling M., 2003, Marketing Papers No. 47

2. Online sources:

- B.R. Rating, 2008, Management and Capitalization of the Brand Asset - Method and Benefits of Brand Rating
- Daum Jürgen H., 2003, Transparency Problem Intangible Assets, Url: http://www.iioe.eu/fileadmin/files/publications/ICS_DK_J_Daum_IA_Horvath_de.pdf Handelsblatt, March 27, 2013, “Verdi draws a“ bitter balance ”of the Schlecker bankruptcy ")
- ICM-Gatherin, 2012, The Profitability of Intellectual Capital, Url: http://www.adiat.org/es/documento/373.pdf).
- Interbrand, The Brand Valuation of Interbrand, 2005
- Interbrand, 2012, Brand Valuation Url: http://www.interbrand.com/Libraries/Articles/Brand_Valuation_Final.sflb.ashx
- New York Times, June 25, 1988, Company News OECD, 1999, "Guidelines and Instructions for OECD Symposium").
- PwC, February 21, 2012, press release: Brand value is the most important factor influencing corporate success Süddeutsche Zeitung, December 28, 2012, “R.I.P. Schlecker, Kodak, Neckermann and Co. "Url: http://www.sueddeutsche.de/wirtschaft/rip-schlecker- kodak-neckermann-und-co-it-was-once-a-brand-1.1556421)
- Wirtschaftswoc, January 24th, 2012, "The Schlecker brand is burned"

[...]



1 The due diligence is presented as a company valuation

2 In Germany, intellectual capital is also referred to as human capital

3 PWC developed the GFK method in cooperation with the University of Hamburg and Professor Sattler. Using this method, an exact value of 56% was determined

4 Stakeholders are also known as interest representatives