In 2011, Tata became the first Indian brand to be named in the top 50 global brands in Brand Finance's 2011 Global 500 report, which assigned the Tata brand a value of $15.8 billion. What approaches would you use to estimate the value of brands? What

Question

assumptions underlie these approaches? As a financial analyst, what would you use to assess whether the brand value assigned by Brand Finance was a reasonable reflection of the future benefits from this brand? What questions would you raise with the firm's CFO about the firm's brand assets?

Answer 1

In thinking about how to estimate brand value, an analyst might use any of the following approaches. First, one might estimate brand value based on the premium price that company's branded products or services command over their non-branded counterparts. Given the firm's sales volume of branded products and services, the expected life of the brand, and a discount rate, it is possible to estimate the present value of any price premium over the foreseeable future. Second, a brand could be valued based on the present value of advertising costs required to convert a non-branded product or service into a branded product or service. Third, brand valuation experts could estimate value based on industry practice, amounts that were paid for similar branded products in recent mergers and acquisition transactions.
Several assumptions underlie the above brand valuation approaches. First, under the price premium approach, brands will only have value if: (a) the consumers will continue to value branded products more highly than non-branded in the foreseeable future, (b) companies continue to maintain the value of their brands, despite potential competition, and (c) premium prices are accompanied by higher advertising outlays, so that brands create economic value for shareholders.
The second and third valuation approaches requires that the valuator assume that the product or service being valued requires the same level of advertising or has the same relative value as comparable brands used to benchmark the valuation.
An analyst should question the company on the amount of any intangible asset reported on its balance sheet that relates to its brand. Regardless of what Brand Finance is reporting, if the company carries an intangible asset related to brand, is the company confident that this asset valuation is reasonable? How was the figure calculated? Was an independent valuation expert hired? Did the independent auditors question the amount? Has the amount grown or declined in the past couple of years or is it expected to be adjusted in coming years? Why? What activities and expenditures did Tata incur in order to build and maintain the brand name, and what future expenditures and programs are planned?