Explanation of the methodology
The methodology employed in the BrandFinance® Global 500 uses a discounted cash flow (DCF) technique to discount estimated future royalties, at an appropriate discount rate, to arrive at a net present value (NPV) of the trademark and associated intellectual property: the brand value.
Five Steps - Royalty Relief Valuation
1. Determine forecast revenues
Determine future revenues attributable to the brand over a five year explicit forecast period. This is done by referencing historic trends, market growth estimates, competitive forces, analyst projections and company forecasts.
2. Assess the Brand Strength
Determine the strength of the brand using the ßrandßeta® Index.
3. Establish Royalty Rate
Review comparable licensing agreements. Analyse margins and value drivers. Establish average royalty rate range for relevant sector. Apply ßrandßeta® Index to royalty rate range to determine royalty rate for the brand.
4. Determine the Discount Rate
Determine discount rate to calculate the net present value (‘NPV’) of future brand earnings (accounting for the time value of money and the associated risk).
5. Brand Valuation Calculation
The NPV of post-tax royalties equals the brand value.
Royalty Relief approach
The Royalty Relief approach is based on the assumption that if a company did not own any trademarks it would need to license them from a third party trademark owner instead. Ownership therefore ‘relieves’ the company from paying a license fee (the royalty) for the use of the third party trademarks
The Royalty Relief method involves estimating likely future sales, applying an appropriate royalty rate to them and then discounting estimated future, post-tax royalties, to arrive at a Net Present Value (NPV). This is held to represent the brand value.
Brand Finance uses the Royalty Relief methodology for three reasons:
- Firstly, it is the approach that is most recognised by technical authorities worldwide and favoured by accounting, tax and legal users because it calculates brand values by reference to comparable, third-party transactions.
- Secondly, it ties back to the commercial reality of brands - their ability to command a premium in an arm’s length transaction.
- Finally, because it can be performed on the basis of publicly available financial information.
These are calculated using Brand Finance's ßrandßeta® analysis which benchmarks the strength, risk and potential of a brand, relative to its competitors, on a scale ranging from AAA to D. It is conceptually similar to a credit rating. The data used to calculate the ratings comes from various sources including Bloomberg annual reports and Brand Finance research.
Brand ratings definitions:
AAA -- Extremely strong
AA -- Very strong
A -- Strong
BBB-B -- Average
CCC-C -- Weak
DDD-D -- Failing
Valuation date: All brand values in the report are for the year ending December 31, 2012.