Brand Valuation in Practice

Accounting regulations prevent us from recognizing self-created brands as assets in our balance sheets (§ 248 Abs. 2, S. 2 HGB; IAS 38.48 & 38.63; § 197 Abs. 2 UGB), leaving us without a tangible value for our brand. However, this does not mean that its value does not exist.

Purchase Price Allocation (PPA) is a process carried out after a business acquisition to allocate the purchase price to the acquired company’s various assets and liabilities. A key component of this process is brand valuation.

For self-created brands, their value is often not recorded in the seller’s balance sheet, as accounting regulations prohibit the recognition of internally developed intangible assets such as brands. It is only during a transaction that the true value of a brand becomes visible through PPA and is recognized in the buyer’s balance sheet. The brand value is separately assessed and allocated to the buyer’s intangible assets. This process allows for a clear observation of the brand’s share in the overall purchase price.

In cost-based methods, the value of a brand is derived from the effort required to reproduce the brand. In this process, the costs that would be necessary for an exact duplicate of the brand can be considered (Reproduction Cost Method). Alternatively, the brand value can be derived from the costs required for the creation or acquisition of an asset with equivalent utility (Replacement Cost Method).

In a market-based method, the value is derived from observable market prices. In this process, the analogy method can also be applied, where a comparison is made between the observable price of a comparable brand and the brand value to be determined.

According to the capitalized value method, the value of an intangible asset or a brand is determined by the sum of the present values of future cash flows expected to be generated from the use of the intangible asset over its economic useful life as of the valuation date. Within the capitalized value method, all relevant sub-methods can generally be applied, with various valuation techniques available. (IDW S 5 (2015), Sec. 28f., p. 7; DIN ISO 10668 (2010), pp. 4f.)

According to a study by Ocean Tomo, intangible assets now account for 90% of total corporate value when measured by the market price of the S&P 500.

Brands, in particular, play an increasingly significant role in a company’s overall value. As the German Patent and Trademark Office aptly states: “Brands are capital and key influencing factors that can enhance a company’s total value.”

Various studies confirm the growing impact of brands on corporate valuation.

A 2019 PwC study found:

• 51% of respondents consider the value contribution of brands to be one of the most important factors influencing overall corporate value.
• 42% believe that the impact of brands will increase significantly compared to other assets.

Another study highlights the substantial role of brands from the perspective of auditors, tax advisors, and M&A consultants:

• In the B2C sector, brands contribute an indicative 31–40% of total company value.
• In the B2B sector, this range is 21–30% (M&A Review, 2019).

Brand Valuation as the Key to Success

Optimal strategic positioning in mergers and acquisitions

The complexity of a business acquisition, generational succession, merger, or divestment is often driven by financial and tax considerations. Valuation gives the brand substance, influences negotiations, and plays a crucial role in contract finalization. This is because self-created brands are not recorded in financial statements. A separate brand valuation in the M&A process provides potential buyers with clear insights into the company’s value drivers, strengthening their confidence—often leading to a higher purchase price. It highlights the brand’s contribution to market positioning, customer loyalty, and profitability, reinforcing the seller’s price expectations. Especially for established brands with strong future potential, brand value can represent a significant portion of the total company value. A well-founded brand valuation ensures fair pricing, minimizes risks, substantiates the sales value, and maximizes the chances of successful transactions and long-term synergies.

Brand Valuation as a Critical Factor

Brand valuation is essential for accurately determining value when outsourcing to an IP company and for mitigating risks.

When establishing an IP company to which brand rights will be transferred, a brand valuation is indispensable. It enables a precise assessment of the value being transferred and supports the strategic management and monetization of brand rights, as demonstrated by Siemens AG. In this case, brand rights were contributed as assets to a specially founded Trademark GmbH & Co. KG. Additionally, this approach separates brand rights from the risks associated with the operating business, ensuring greater financial and legal security.

Brand Valuation in Sale-and-Lease-Back Transactions

Brand valuation is crucial in sale-and-lease-back transactions to determine the sales value and ensure market-based conditions.

Companies use sale-and-lease-back transactions to free up capital by selling brand rights and subsequently leasing them back. Brand valuation plays a key role in determining the sales value and ensuring that the transaction takes place under fair market conditions.

(Example: The Valensina brand.)

Accurate Brand Valuations Support

A precise brand valuation helps companies optimize their strategy, strengthen their market presence and create added value.

The insights gained from an accurate brand valuation go beyond mere numbers. Companies can recalibrate their strategic direction, position themselves more clearly within their market segment, and base strategic actions on solid insights. Which brand valuation levers can be identified as value drivers, and how do they contribute to increased brand value and overall business success?

Financial Insight

Financial insight provides strategic direction.

Brand valuation offers not only financial but also strategic clarity. By allocating financial resources effectively, companies can strengthen their brand and expand their brand reach. How deeply is my brand embedded in the minds of customers? How is this reflected in the brand’s value?

Brand as a Means of Capital Acquisition

The key to securing capital and expansion opportinities.

Brand valuation also paves the way for capital acquisition. The monetary value of a brand can serve as collateral for financing agreements, unlocking new opportunities for growth and expansion. (Even Calvin Klein used the brand as a financing instrument; Bezant, M. 1998, p. 253.)

The License Price Analogy

A proven valuation method

The license price analogy is an internationally recognized method for brand valuation (in accordance with IDW S5, DIN ISO 10668, and ÖNORM A 6800). It is widely used by renowned companies. For example, Adidas applied this method during the purchase price allocation of runtastic GmbH in 2015, and Gerry Weber International used it for the acquisition and valuation of the Hallhuber brand in the same year.

The license price analogy is a well-established brand valuation method based on the “Relief-from-Royalty” approach. This method determines a brand’s value by estimating the hypothetical license fees that the owner would have to pay if they were licensing the brand from a third party. The core assumption is that brand ownership provides an economic advantage by eliminating the need for royalty payments. To calculate the brand’s value, comparable market license rates from similar brands in the same industry are analyzed. These royalty rates are applied to the brand’s future projected revenue and discounted to present value using an appropriate discount rate. This approach provides an indicative brand value assessment, reflecting the potential financial benefits that the brand offers to the company.

Enter the last revenue generated with the brand. Based on this, you can now specify the planned annual revenue growth rate (in percentage) for the detailed planning phase. Typically, a detailed planning phase spans between 3 to 5 years. Key question: How much will brand revenues grow in the coming years (forecast)?

The calculation of brand value using capital value-oriented methods must be performed on an after-tax basis according to IDW and DIN ISO 10668. The applicable tax system is that of the country where these financial surpluses are taxed. You can either refer to databases (e.g., OECD) to obtain the tax rate or use your company’s own corporate tax rate as an indication.

The license price analogy aims to isolate the brand.

Key question: What would a company have to pay for a brand if it did not own it? In other words, what would be an appropriate or hypothetical royalty rate for the brand that one would be willing to pay? Simplified, this can be compared to a calculated “brand rent.” To determine this, companies can refer to comparable real licensing agreements from databases or derive an appropriate royalty rate based on brand strength. (Our experts are happy to assist you with this.) At this stage, a company can consider what revenue-based royalty rate it would be willing to pay for the right to use the brand—if it were not the owner. Typical royalty rates range between 1-5%, depending on the industry.

In the capital value-oriented approach, future cash flows are discounted using a risk-adjusted discount rate. In practice, the Weighted Average Cost of Capital (WACC) of the company serves as the basis. As an approximation, the company’s WACC can be used. Typically, for brand valuation, a risk premium of 1-3% is added to the WACC. If the WACC is not readily available, various databases can be used to derive an indicative WACC.

Key Question: How long will the brand generate these hypothetical licensing revenues? Will it be 5 years, 10 years, 15 years, or is the time frame uncertain because the brand is so strong that an end is not foreseeable (Terminal Value; TV)?