Over the past sixty years, there has been a significant shift in the source of economic value creation from tangible to intangible assets. By 2020, a mere 10% of the S&P 500’s value was tangible, with the remaining 90% comprising capitalized and undisclosed intangible value, including goodwill. This underscores the central role of intangible assets in creating and maintaining economic value for businesses.
Brand valuation, a key component of intangible assets, varies in importance and inherent value across industries. For example, in consumer goods industries like fashion and cosmetics, the brand is often the most valuable intangible asset. However, the value of a brand extends beyond consumer-facing sectors, playing a vital role across most industries in differentiating companies in their strategic markets and satisfying customer needs.
Even in the B2B sector, where the significance of brand might seem less apparent, a strong brand can command customer preference and a price premium due to its association with high-quality products, strong customer service, and reliability.
Brands can be defined in various ways, depending on the context. They range from narrow definitions like trademarks and trade names, representing specific visual elements, to broader definitions that include organizational culture, people, and business activities. This wider definition is crucial as it extends beyond legally protected elements to represent the full organizational brand value proposition and promise.
The impact of a strong brand is extensive. It can attract higher-quality staff, negotiate better terms with suppliers and financiers, and influence customer preference, highlighting its significant role in economic value creation.
Despite the challenge of capitalizing brands on balance sheets under international accounting standards, unless acquired through a transaction or business combination, brand valuation remains critical. It helps in understanding brand-driven business performance, ensuring tax and transfer pricing compliance, and supporting M&A activities, among other aspects.
Brands are vital value-creating assets within organizations, and understanding what drives their value is crucial for aligning brand decision-making with business strategy. Accurate brand valuation not only illuminates the brand’s contribution to the business but also guides strategic decisions that can enhance overall organizational value and market positioning.